What Are ELSS Mutual Funds And Its Features?
Investors are always looking for a chance to make investments in the right type of investment plan that will help them gain great returns, grow their wealth and also save tax. There are an umpteen number of plans and policies available in the market for the investors to choose from. Returns on most of these plans/schemes are taxed according to the Income tax rules. When it comes to saving tax, ELSS funds are the best place to invest. Equity Linked Savings Scheme is the best tax saving investment that offers tax redemption.
What are ELSS funds?
Equity Linked Savings Schemes are tax-saving equity mutual funds. This fund falls under the diversified equity category. In this scheme, at least 80% of the assets are invested in equity and related instruments while the rest is invested in debt funds as well. This scheme provides dual benefits to the investors.
It not only helps in appreciating/growing the capital investment but also helps in saving tax. Investors can claim the tax deductions under the Income Tax Act and invest upto Rs. 1.5 lakh a year (financial year). ELSS funds have a mandatory lock-in period of three years. After the lock-in period is completed no tax is deducted.
Who should invest in ELSS funds?
Any individual or business who wants to save taxes under the section 80C of the Income Tax Act can invest in ELSS mutual funds. These mutual fund investments are subjected to a certain amount of risk. Hence, it is best for the investors who know and understand the risk attached to equity assets. Undoubtedly, these funds offer greater returns as compared to other tax saving schemes. This isn’t the greatest scheme for investors looking for benefits in the shorter run. They need to have a long term goal for their ELSS investments. These funds have the lowest lock in period compared to the other asset classes that qualify for tax deduction.
Features of ELSS Mutual Funds.
- Equity Investment – At least 80% of the total investable amount is invested in equity and equity related instruments. Equity Instruments hold a higher level of risk than debt, bonds or other money market instruments. The investor must be a risk taker for investing in such schemes. These funds offer greater returns in a longer run but can be unstable and are not suitable for returns in a shorter period of time
- Tax benefit – ELSS is the best choice if the main goal is tax saving. It qualifies for tax deductions under the Income Tax Act
- Investment Limit – There is no maximum amount set for an investor to invest in ELSS funds
- Lock-in Period – There is no maximum tenure for ELSS funds. However, there is a lock-in period of three years
- Methods of investment – ELSS has two methods to invest – SIP and Lumpsum. One can invest monthly through SIP or can make one lumpsum investment
- Tax on returns – Not all returns are tax free in ELSS. “Investment Returns above Rs. 1 lakh are taxed at a 10% rate”
- Withdrawing funds – Investors can withdraw ELSS investments after the 3 year lock-in period is completed
