What are ELSS funds? How does it work?

If you’re looking for an investment that not only helps in saving taxes but also offers the potential for higher returns, Equity-Linked Savings Schemes (ELSS) could be a smart choice.

Let me help you understand ELSS funds, how they work, and why they might be a great addition to your investment portfolio.

What is ELSS?

Equity-Linked Savings Scheme (ELSS) is a type of mutual fund that primarily invests in equities (stocks) of companies across various sectors. It is known for its dual benefit: tax savings and potentially higher returns. Under Section 80C of the Income Tax Act, investments in ELSS funds are eligible for a tax deduction of up to ?1.5 lakh. Unlike many other tax-saving instruments, ELSS has a shorter lock-in period of just 3 years, making it an attractive option for investors looking for liquidity alongside tax benefits.

How Do ELSS Funds Work?

ELSS funds function similarly to other equity mutual funds but come with a few key differences:?

• Diversified Equity Investment: ELSS funds invest in a diversified portfolio of stocks, covering various market capitalisations (large-cap, mid-cap, and small-cap) and sectors. This diversification helps reduce risk while aiming for growth.
• Lock-in Period: A unique feature of ELSS is the 3-year lock-in period, the shortest among all Section 80C tax-saving investments. Investors cannot redeem their units before the completion of three years from the date of investment. This feature encourages a long-term investment approach, potentially leading to better returns.
• Taxation on Returns: Returns from ELSS funds are subject to tax. If the gains are more than ?1.25 lakh, they attract Long-Term Capital Gains (LTCG) Tax at a rate of 12.5%. If redeemed before 1 year, a Short-Term Capital Gains (STCG) Tax of 20% is applicable.
• Fund Management: ELSS funds are managed by professional fund managers who analyse and select stocks to build a balanced portfolio. The expertise of these managers is crucial in maximising returns while managing risk.

______________________________________

Are you a founder who wishes to see his/her employees take their first step towards financial independence and early retirement?

Then let’s connect!

E: [email protected]

M: 9821604824