Finance

WHAT IS ELSS AND WHEN SHOULD YOU INVEST IN ONE?

6/28/2018 Lokesh kumar 0 Comments


With the varied number of investment products available in the market, it is important to understand the features and functioning of every product before making an investment decision. An important investment product, Equity Linked Saving Scheme is a hot topic of discussion amongst investors. ELSS are basically mutual funds that calculate the returns from the equity market.


What is ELSS?

Classified as tax saving instruments under Section 80C of the Income Tax Act, ELSS are usually open-ended equity funds. To understand ELSS, it is important to understand mutual funds. Mutual funds are an investment product that is managed by a professional fund manager. The fund manager invests the amount into different products in the market. These include equity, debt and bonds (ELSS, however, contains only equity stocks). Based on the type of fund chosen by you, the fund manager makes an investment decision.

ELSS is a mutual fund and allows investors to save up to INR 1,50,000 (as per the 80C limit in a financial year) on income tax. If you are new to the market, it is an ideal option for you. It is specific to the equity market,and the investment portfolio will vary according to the market movement. It is essential to remain invested in ELSS throughout the lock in period of three years to gain maximum benefit from the investment.

ELSS investment can be started with an amount as low as INR 500,and there is no upper limit to the amount of investment you can make. It has a lock in period of three years which will help you secure your savings. There are two options for you to choose from.

1.       Growth Option

This option is ideal for investors who are looking to create wealth in the long term. It is a high-risk alternative as the investment will be made into high growth stocks in the equity market. The investor may choose to receive the accumulated amount when the lock in period ends or the investor may choose to reinvest the same into a different plan. The fund is directly connected to the equity market,and the value of the fund will vary according to the volatility of the market.

2.       Dividend Option

With the dividend option, an investor will receive tax free dividend payouts throughout the investment period. There are two options to choose from, one is dividend payout,and the other is a reinvestment of dividend. The first option, dividend payout allows the investors to receive tax free dividends while the second option, dividend reinvestment allows the investor to make a free investment with the benefit of a tax deduction.

Lock-in Period in ELSS Investments

Like most tax-saving investments ELSS also carry a lock-in period for investors. ELSS’ three years lock-in period is lower than other similar investments. However, given the fact that it is a 100% equity investment, investors should aim to stay invested for at least five years.

You may liquidate your ELSS investment even within the lock-in period through the offline sale. But in such case your tax rebate u/s 80C will be rescinded, and you end up paying additional tax in the year you liquidate your ELSS investments.

When Should You Invest in ELSS?

There is no specific age or time when you should choose to make an investment in ELSS. However, it helps to invest in ELSS with a goal in mind. It will ensure that you remain invested throughout the lock-in period and will allow your wealth to grow. You can either invest a lump sum or choose to invest through a Systematic Investment Plan. It is advisable to opt for a SIP as it will reduce the risk associated with the volatility of the market.

Through SIP, the investor contributes a fixed amount each month to the fund. Every investment is treated as fresh and the three-year lock in period applies to each one separately. Investing through SIP instills financial discipline,and the investor gets the benefit of averaging. That is, he gets more units when the market is low and gets few units when the market is high.

The biggest advantage of ELSS investments is the short lock-in period. The potential for generating higher returns is also high since it is an equity linked scheme. Even with a dividend option, the investors can get some gains within the lock in period.

Investing in ELSS can be convenient and more beneficial through SIPs. Investing in ELSS is suitable for investors who are not risk averse and who are looking for tax saving instruments. It is ideal for investors to begin investing in ELSS at an early age to generate higher returns in the long run.