What are ELSS funds?– We all know about mutual funds. So ELSS is a type of mutual fund.
It is basically for those who want to save their taxes. Here we will talk about all pros and cons of ELSS funds.
Do you guys know the full form of ELSS? Most of you may don’t know. Well, it is Equity Linked Saving Scheme.
It is the only mutual fund, covered under section 80C deductions.
Definition of ELSS funds?-
It is a diversified equity mutual fund. It offers a tax deduction of up to Rs. 1.5 lac per annum.
The public wants to invest in ELSS funds mainly for two reasons.
Firstly, they get a decent return because it is a mutual fund and secondly they get the tax benefits. But there are many questions like-
- Advantages of ELSS fund.
- Comparison with other investment plans.
- How much return can we expect?
- Should we invest with SIP or Lumpsum?
- Is there any lock-in period.?
- How to choose the right ELSS fund?
In this article, we will discuss all these questions.
Advantages of ELSS fund ( What are ELSS funds? )—
ELSS fund has three main advantages. Here you will get a decent return.
If you check all the Tax benefit investment options, you will see that the ELSS fund is the best option.
Here you will get a 13-14 percent of return if you invest for a long time.
That means if you see the annualized return of 5 to 7 years then you will see that in most cases you have got 13 to 14 percent interest.
The second benefit is you will get the Tax benefit under section 80C.
And the third benefit here is- the risk is moderate just because you are not investing directly in the stocks.
If you want to invest directly in stocks then you should have deep knowledge about the Share Market.
Otherwise, you will be at loss. But in the mutual fund, there is a fund manager who is managing your money.
And he/she is much more knowledgeable than you. So the risk is not that high like the share market.
Comparison of ELSS funds with another investment plan–
|Here the risk is moderate.||The risk is very low.||Here also the risk is almost negative.||The risk is moderate.|
|The lock-in period is a minimum of 3 years here.||If you are investing in a tax-saving FD then the lock-in period will be 5 years.|
Otherwise, there is no lock-in period.
|The Lock-in period is 15 years.||You can not withdraw your money before retirement.|
|Here the returns are taxable if you are getting a return of more than 1 lac in a year.|
You need to pay 10 percent long-term capital gains.
|Here also the returns are taxable.||Don’t need to pay tax on returns.||Here also the return is non-taxable.|
|Here you can expect 13 to 14 percent of post-tax returns.||You can expect a 5-6 percent return here.||You can expect 7-8 percent of return.||The expected return can be 8 to 13 percent.|
This comparison can give you an overall idea about all the investment plans.
How much return can we expect? —
As we discussed before you can expect a return of 13-14 percent after the tax deduction.
In most cases, the return does not cross the limit of 1 lac a year, so if that happens then there is no question of tax deduction.
But if someone invests a lot of money then it can happen and if it happens then he has to pay tax.
Should we invest through SIP or Lumpsum in ELSS funds?—
It is different for different people.
But many investments advisors ask you to invest with SIP to average out.
Let’s talk a bit about what should be invested through in ELSS fund.
If you want to invest a lumpsum amount then you should have good knowledge about the market.
If you try to understand the market with a little time, then investing with lumpsum may be better for you.
But if you have no idea of the market and do not have time, then it is better to invest with SIP.
If you invest in the long term, the advantage of SIP is that your return will be average out.
The upside-down of the market will not have much effect on your investment.
Is there any lock-in period in the ELSS funds–
As we discussed before, here the lock-in period is 3 years.
In the case of the lump sum, you will understand by yourself, but in the case of SIP, it may little difficult to understand how the three years period is calculated.
Let’s take an example. If your SIP is on 15th June 2021, then this SIP will mature on 15th June 2024.
On the other hand, your next SIP will be on 15th July 2021, and this SIP will mature on 15th July 2024. This will be the process.
Since all your money is not maturing together in SIP, that is why if you want to withdraw all your money at a time, then you have to wait after 3 years also.
This should not be a problem for you if you invest in long-term.
How to choose the right ELSS funds? —
There are two types of funds. One is the Growth fund and another one is the Dividend fund.
In the Dividend fund, you will not get compounding gain.
You will get a dividend from here every month. But since it is not re-invested, you will not get the compounding gain.
Yes, you can re-invest your Dividend.
But the lock-in period will be calculated from the re-investment date.
But in the Growth fund, you will get compounding gain.
Like if you are getting 13 percent of interest then the 1,00000 rupees of your will be 1 lac 13000 thousand rupees after one year.
In the next year, you will get thirteen percent interest on that 1 lac 13000 thousand rupees.
In this way, you will get compounding gain in the growth fund.
Now you will ask in which fund ( Aggressive, safe or Balanced fund ) you should invest.
Here the safe funds are Large Cap funds. It has a lower risk.
( Large Cap funds means- the top 30 companies of Sensex and top 50 companies of Nifty. )
In the Mid Cap funds, the risk is moderate.
In the Small Cap funds, the risk is higher.
I think you can invest your money in a balanced fund.
Because it invests in Large-Cap, Mid Cap, and in the Small Cap also.
Because here Large Cap gives you a little safety and for Mid and Small Cap you get a little better return.
But if you are new and do not want to take a higher risk then you can invest in a Large Cap.
A bonus tips on ELSS funds–
Now the question is, when should you do tax or investment planning.?
Start of the year or End of the year.? Most people do it at the end of the year.
If we talk about these ELSS funds or mutual funds, the highest investment is between January and March.
More than 50 percent is invested between January and March, which is not right.
First of all, if you invest early in the year then your invested money will have a lot more time to give you a good return.
And at the same time, there is a possibility of averaging out.
Is ELSS taxable after 3 years?
You have to give 10 percent on long-term capital gain after three years. You can claim a tax deduction of up to 1.5 lac under 80c.
Which is better ELSS or mutual fund?
It is a type of mutual fund. Only in some cases, it differs from many mutual funds.
How do I choose a good ELSS mutual fund?
You should check the expense ratio. Read the article to know more.
How to invest in an ELSS fund online?
If you have a DEMAT account then you can invest through that. Also, you can invest through GROW app.
Is ELSS a good investment?
If you want a tax deduction and want to earn a decent percentage of return then it can be a good option.
Can I withdraw ELSS before 3 years?
No, you can’t withdraw your invested money before 3 years. Because it has a lock-in period of 3 years.
How do I redeem my ELSS money?
You can directly redeem your invested money from AMC ( Asset Management Company ). You can use their online portal to redeem your money.
If you have any other questions on this topic then you can comment below.