As a new financial year kicks off, investors start exploring tax-saving and wealth creation opportunities. One instrument that serves both purposes is an Equity-Linked Savings Scheme or ELSS fund. ELSS provides attractive tax benefits while enabling wealth creation through equity exposure over long periods. Let’s understand why ELSS merits consideration this financial year.
What is an ELSS Fund?
An ELSS or Equity-Linked Savings Scheme is a type of mutual fund investment that predominantly invests in equities. As per regulations, ELSS funds must allocate at least 80% to equities and equity-related securities. They carry a 3-year lock-in, making ELSS suitable for long-term wealth goals.
One can claim deductions up to Rs 1.5 lakh by investing in ELSS under Section 80C of the Income Tax Act, 1961. So, you save taxes today and build wealth over the years with ELSS funds.
Why Consider Investing in ELSS?
Here are some key advantages of investing in ELSS funds:
Tax Savings Plus Growth Potential
Foremost, ELSS funds help investors save taxes through Sec 80C rebates up to Rs 46,800. Additionally, the funds generally deliver healthy long-term growth courtesy of their exposure to equities. So ELSS enables tax savings today plus corpus growth over time.
Relatively Short Lock-in
Unlike tax saving schemes like PPF, ELSS carries a lock-in of only 3 years. This shorter lock-in period and equity participation place ELSS nicely to create wealth over the long run.
SIP Option
One can invest in ELSS funds through both lumpsum investments or periodic SIPs. This brings investment flexibility along with the benefit of rupee cost averaging via SIPs.
Professional Fund Management
ELSS funds allocate money into equities and equity-related instruments based on research and analysis conducted by expert fund managers. Retail investors, therefore, benefit from both exposure to equities and seasoned fund management.
Understanding Long-Term ELSS Returns
ELSS funds principally target long-term growth via equities. Hence, returns may seem volatile in the short run but can substantially outpace inflation over 5, 7 or 10-year periods.
When analysing ELSS schemes, focus on long-term metrics like:
- Multi-year CAGR Returns
- Fund Manager Track Record
- Portfolio Composition
- Expense Ratios
- Minimum Investments
Once a suitable ELSS fund is identified, investing via SIPs helps benefit from volatility and wealth averaging over long periods.
Conclusion
ELSS serves the twin benefits of tax savings and participating in equity growth over long investment horizons. While market movements may cause short-term fluctuations, a prudently managed ELSS backed by comprehensive research has historically delivered healthy returns over 7-10-year periods.
So, ELSS merits consideration by investors willing to remain invested for longer periods and seeking tax savings this fiscal. It may be wise to consult your financial advisor and assess your risk-return profile before parking funds into ELSS.