Equity Linked Savings Scheme is a variegated equity mutual fund scheme with most of the capital from investors invested in the equity market. The performance of the equity over the years determines the returns, which are higher when compared to the returns from Fixed bank deposits, Public Provident Funds, and National Saving Certificates. Furthermore, the returns of ELSS aren't taxable in contrast to those of PPF and NSC.

This mutual fund scheme owes its popularity to its use as a valuable tax-saving instrument; investors can avail of tax deductions up to a limit of 1.5 lakhs under section 80C of the Income Tax Act. Asset management companies work the market and churn profits off the investment by investing the money in the financial market.

ELSS funds are locked in for 3 years, and the investor has the prerogative to simply leave the scheme after selling it post the lock-in period.

This lock-in period has an added benefit to it. If it is an average mutual fund without a lock-in period, then an individual is more likely to quit before maturity owing to monetary constraints. But ELSS doesn't afford that luxury and makes way for better returns.

Then again, this only sometimes works to your benefit. In a market slump, one can barely do anything to protect the funds. You'd be forced to wait until the tenure on the scheme ends before you can withdraw the amount, and until that happens, the damage would be irreversible. Monthly investments are also worked to a disadvantage due to the lock-in factor. An investment in the nth month can only be withdrawn on the (n+36)th month.

ELSS Investment Options

  • Growth option: Any gains resulting from rising in the stock market won't be received through dividends. Only after the maturity period of the scheme will you be given the entire amount. Risk on returns based on market conditions doesn't bode well for long durations and isn't feasible.
  • Dividend Option: Rather than receiving a lump sum at the end of the maturity period, the dividend option lets you reap benefits in regular intervals. These dividends are altogether exempt from taxation.
  • Reinvestment Option: Should you choose this option, you should be allowed to invest the dividends received by you back into the net investment. In good market conditions, reinvesting can increase the chances of higher returns.

Advantages Of ELSS

Better Earning Potential

As mentioned before, ELSS fares better in terms of returns when compared to the majority of other investment options. The mELSS's market performance for the past 5 years proves this edge over the alternatives. Although the lock-in period is 3 years, the investor always retains the option of letting it keep on, thus increasing the chances of higher returns, all while using the scheme for tax exemption.

Tax Savings

The Income Tax Act of 1961 does not offer tax redemption for regular mutual funds. However, it does offer tax redemption for the equity-linked saving scheme. If you were to invest in ELSS, you could deduct 1.5 lacks from your taxable income and bring down your tax liability. Further, any returns from the equity-linked saving scheme would be excused from taxation.

Lock-In Period

Other investment options like PPF, NSC, and fixed deposits have substantially more extended lock-in periods than the equity-linked saving scheme; PPF has a lock-in period of 15 years. This gives rise to ELSS being more investment advantageous if the deal breaker for you is immediate liquidity.

Systematic Investment Plan

Systematic Investment Plan allows the common public to invest in the financial market without finding the prospect too intimidating or financially taxing. Systematic Investment Plans enable ordinary people to invest in the financial market without seeing the chance as too fierce or economically taxing. As opposed to investing a lump sum in one go, Systematic Investment Plan allows you to invest in smaller portions every month. SIP gives you the wiggle space to support without overtaxing your income. This option doesn't have any bearing on ELSS's tax exemption benefits and investment returns.

Saving While Investing In Equity

Savings give you about 8% of returns, while investing in equity may have favorable benefits depending on the stock market conditions. Maintaining a good portfolio and making adjustments commensurate to the stock market's volatility may ensure high returns.

Investing In ELSS Carries A Fair Amount Of Risk

For individuals who are in it for short-term gains, the risks of betting on the financial market seem a daunting task because of the volatility of the market. However, for those prepared to bide their time and invest for a more extended period, volatility ceases to be as much of a factor. The longer the investment period, the more likely you will receive substantial returns.