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Understand how ELSS schemes work

Understand how ELSS schemes work

What is ELSS?

As the name suggests, Equity Linked Saving Scheme (ELSS) is a mutual fund scheme that invests in equity shares. Among the available mutual fund schemes in India ELSS offers higher tax benefits all the while creating wealth for your future.

Investments done in ELSS of up to 1.5 Lac are eligible for tax deduction under section 80C of the Income Tax Act. Another key advantage ELSS offers over other tax-savings schemes is the shortest lock-in period which is of 3 years. You may withdraw your investment or sell your shares only after 3 years. However, the long-term investment in ELSS offers higher returns. Moreover, you save taxes which acts as an extra income.

How do ELSS Mutual Funds work?

ELSS Funds are primarily invested in stocks of different companies and across different sectors. The fund houses choose the stocks to invest in depending on the market capitalization of the companies. This can be anything from small-cap, mid-cap, large-cap, and multi-cap.

Your ELSS investment is managed by professional fund managers. These fund managers do in-depth research of the market, the current trends, and the company shares before investing. This highly increases your chances of getting considerable returns than when you invest in stocks by yourself.

Advantages of ELSS Mutual Funds

  • Shortest lock-in period:

Among the tax-saving investment schemes, ELSS has the shortest lock-in period of 3 years. This is shorter than tax-saving fixed deposits which are five years and PPF which has a lock-in period of 15-year maturity.

  • Higher returns:

Unlike other conventional tax-saving options under 80C such as PPF or FDs, ELSS is market-linked. Thus, investing in ELSS gives you a greater opportunity of creating significantly higher wealth in a medium to the long-term investment horizon.

  • Convenience:

Through monthly SIP you can easily start investing a small amount in ELSS every month.

How to invest in ELSS schemes?

  • Growth option:

When you choose the growth option, you won’t receive the returns in the form of dividends. Your returns get added to your principal amount which further helps you receive higher returns. You can receive the gains only at the time of redemption. This helps to appreciate the NAV and multiply your profit. However, you should keep in mind that the investments you make in ELSS are subject to market risks.

  • Dividend option:

If you go for the dividend option, as an investor you receive the benefits in terms of dividends periodically. The returns you get through the dividend option are completely tax-free. The companies declare dividends only when there is excessive profit.

  • Dividend Reinvestments option:

Under this option, the investor reinvests the received dividends to add to the NAV. This approach works well when the market is seeing a surge and the trend is likely to continue for a while.

Now that you know what is ELSS, how it works, its benefits, and how to invest in ELSS schemes, tax saving and wealth creation becomes easier. The key to receiving higher returns over a longer period though is to start investing early. So, start investing today for a better tomorrow.

About This Author

Shaheen ShaikhShaheen Shaikh
Joined: April 29th, 2018
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