ELSS Funds: Key Features and Working Mechanism Explained
Equity Linked Savings Schemes (ELSS) are a popular choice among investors looking to save taxes and generate long-term wealth. But what exactly are ELSS funds, and how do they work??
Let me break it down for you.?
Key Features of ELSS Funds
- ELSS mutual funds offer tax deductions under Section 80C of the Income Tax Act, allowing you to save up to ?46,800 annually by investing up to ?1.5 lakh.?
- This makes them an attractive option for taxpayers aiming to reduce their tax liabilities.
- ELSS funds come with the shortest lock-in period among tax-saving options, just three years.?
- In comparison, Public Provident Fund (PPF) has a 15-year lock-in, while tax-saving fixed deposits have a 5-year lock-in period. This feature provides investors with more liquidity and flexibility.
- At least 80% of an ELSS fund’s corpus is invested in equities, offering the potential for higher returns.?
- These funds diversify across market capitalisation and sectors, mitigating concentration risk.
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- ELSS funds’ returns are directly linked to market performance, which can vary depending on the underlying equities.?
- Historically, these funds have offered average returns of around 15% over the long term, outperforming most other tax-saving instruments.
- The fund managers invest in a wide range of sectors and companies, reducing risk while aiming for optimal returns.?
- This diversified approach is ideal for those looking to enter the equity market with the added advantage of tax savings.
How Do ELSS Funds Work?
ELSS funds are essentially diversified equity mutual funds that invest primarily in the stocks of listed companies. The fund managers conduct thorough market research to pick the right stocks, aiming to achieve capital appreciation over the long term. When you invest in ELSS, you can choose between a one-time lump sum investment or systematic investment plans (SIPs).
With SIPs, you invest a fixed amount regularly, which helps average out market volatility. This approach not only instils a disciplined investment habit but also allows you to benefit from rupee cost averaging.
Upon completion of the 3-year lock-in period, you can redeem your investments, which are subject to a long-term capital gains tax of 12.5% on gains exceeding ?1.25 lakh. If your gains are below this threshold, you pay no tax at all, making ELSS a tax-efficient investment choice.
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