What is ELSS Mutual Fund? Advantages and Disadvantages of ELSS

What is Equity Linked Savings Scheme ?

The ELSS Mutual Funds are one of the various tax saving investment schemes that come under section 80 C deductions of the Indian income tax laws. ELSS Mutual funds are equity based mutual funds that allow investors to invest in mutual funds schemes that specifically provide the tax saving feature. Investments in ELSS MF come with a lock-in period of 3 years from the year of investment i.e. the money invested cannot be redeemed before a period of 3 years. After the 3 year lock-in period, an investor can still continue his investment for any number of 3 year periods. ELSS investments are flexible like any other mutual funds in allowing SIP mode of investments.

So, if Priya chooses an ELSS MF scheme to invest in, and makes a lump sum investment of Rs. 1,50,000 on April 2017, her investment cannot be withdrawn before April 2020. In April 2020 Priya might opt to withdraw her money from the ELSS scheme or continue to stay invested for another 3 year term i.e. until April 2023.

On the contrary, if Priya doesn’t have Rs. 1,50,000 to invest at a go but she can still arrange Rs. 1,50,000 to invest in an ELSS in the financial year she can choose to do it through a SIP mode. In such a scenario she should be careful to remember that the total of all her ELSS SIP investments in a financial year should come up to a maximum of Rs. 1,50,000 only for the sake of 80 C deductions benefits. The SIP she starts in April 2017 will nature in April 2020, the ones in May will nature in May 2020 and so on for every SIP.

Although Priya can invest more than Rs. 1,50,000 in an ELSS in a financial year, she will be able to claim deductions only upto Rs. 1,50,000. She will continue to earn usual returns on the excess of Rs. 1,50,000 p.a. which will be subject to tax depending on the tax slab her annual income comes under.

How is an ELSS a better tax saving option compared to other 80 C deduction applicable schemes?

Advantages of ELSS

  1. Among all the 80C deductions applicable investment schemes ELSS earns the highest returns on an average of 15% for a 3 year period.
  2. It requires the least lock-in period of just 3 years when compared to 5 years for tax saving FDs, 15 years in case of PPFs, 10 years in case of NSC investments.
  3. Investor with different degrees of risk taking capacity can choose from a variety of ELSS mutual funds to suite them and earn returns that still outdo returns of other 80 C deduction applicable investment schemes.
  4. The minimum amount of investment to start an ELSS investment is Rs. 500.
  5. ELSS MF investment can be done either as a lump sum or a SIP [Read more : What is a MF SIP].
  6. There is an option to choose a growth oriented ELSS or a dividend payout ELSS scheme catering to those interested in capital appreciation and those interested in receiving regular money pay outs respectively. [ Read More : Difference between direct and regular mutual funds].
  7. ELSS MF just like other mutual funds can be invested either through a direct plan or a regular plan. [Read More - Direct plans Vs regular plans in MFs]

Disadvantages of ELSS investments

  1. Not suitable for conservative investors who are not willing to take risks.
  2. No guaranteed returns unlike other 80 C deduction applicable investment schemes.
  3. Thorough research should be performed before investing in an ELSS.
  4. So many funds are available that it becomes difficult for the investors to pick one.
  5. A continuous investment in ELSS becomes difficult for handling in the long run.
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