Are you wondering if you should invest in ELSS funds or not? ELSS or Equity-Linked Savings Schemes are a type of mutual funds that invest majority of their assets (a minimum of 80% of their securities) in equities and equity-related securities. In this article, we will explore the advantages and disadvantages of investing in ELSS funds.
Advantages of investing in ELSS tax saving mutual funds
Following are some of the benefits of investing in ELSS funds. Read on to know a few ELSS benefits:
- To save tax
ELSS funds are widely advertised as tax saver mutual funds as these mutual funds offer a tax deduction of up to Rs 1.5 lacs under Section 80C of the IT Act, 1961. If an investor belongs to the highest tax slab, they can save up to Rs 46,800 per annum by investing in tax-saving investments. It must be noted that ELSS tax saver funds are the only type of mutual funds that provide tax benefits to investors.
- Lowest lock-in period
Another advantage of ELSS tax saver mutual funds is the lowest lock-in duration it provides to investors. ELSS funds have a mandatory lock-in tenure of just three years, which also happens to be the lowest lock-in period against other Section 80C investments. Other tax-saving investments such as Public Provident Funds (PPF) have a lock-in tenure of as high as 15 years.
- To earn significant returns
History is proof that ELSS mutual funds have time and again proved their worth by offering investors with substantial returns (often double-digit returns) when invested for a prolonged period. Have you ever wondered why? Well the reason is simple. This is because ELSS funds invest majority of their securities in equities. On an average, ELSS funds are expected to provide returns around 10 to 15% per annum when invested for a longer duration of ten years or more.
- Ease of investment
Owing to the advanced technology, investors can now invest in ELSS funds easily from their home. Just like any other type of mutual funds, you can choose to invest in ELSS tax saver mutual funds either through a one-time investment of lumpsum investment or disciplined and regular investments of SIP (systematic investment plan).
As ELSS funds are a type of mutual funds, they are meticulously monitored and regulated by the Securities and Exchange Board of India (SEBI). As a result, ELSS funds are quite transparent in nature.
Disadvantages of investing in ELSS funds
Just like every coin has two sides, there are certain drawbacks of investing in ELSS mutual funds as well. Let’s understand the disadvantages of investing in ELSS funds.
- Limited tax benefits
The tax deduction under Section 80C of up to Rs 1.5 lac is not subject to just Section 80C investments. It is a cumulative deduction for all its allied sections such as Section 80CCD and Section 80CCC as well. Hence, if an investor has already crossed their Rs 1.5 lacs tax limit through Section 80CCD or Section 80CCC, they won’t be able to claim any further tax deductions on ELSS funds.