Equity Linked Saving Scheme (ELSS) is equity based Mutual Fund scheme in which allocation is largely made in to Equity. In some of the Schemes a small portion is also invested in debt instruments to provide more balance to the Fund. However since majority of the allocation is in equity it is highly volatile in nature and returns are dependent on the market performance. Thus the prices of the units keep fluctuating with the ups and downs in the Equity market. Although diversification of funds in equities across sectors reduces the risk. It is an open ended fund and can be subscribed at any point of time. The Funds have their Net Asset Value (NAV) which changes according to the market scenario and Investment uses the NAV for the purchase or sell of the units.
Reasons To Invest In ELSS: Features and Benefits
It is not only an investment option but also a very good tax saving option as deductions are available under the Section 80 C (upto 1,50,000/- maximum limit) on the investment made in this Scheme. The income or dividend earned is Tax Free. However the investment has a lock in period of 3 years. If the investment is withdrawn before the expiry of the period it will become liable to Tax.
The investment in ELSS can be made in lumpsum or through Systematic Investment Plan (SIP) where every month on a particular date a certain amount can be invested in the scheme. SIP is more viable as the investment spreads over a longer period thereby it is able to perform better in turbulent market and the risk is minimized. The monthly investment is fixed but because the NAV changes the units purchased also changes every month. This helps to average out investment and reduce the cost of investor. A minimum investment of Rs 500/- per month is required to participate in the scheme but no upper limit is set for investment.
ELSS basically offers two types of investments namely Growth Scheme and Dividend (Payout or Reinvestment) Scheme. Let’s take a close look at them….
Growth Scheme: In this scheme the investor does not receive any income or dividend during the tenure of investment. The accumulated lumpsum is paid at the time of redemption of the fund based of the prevailing NAV. This scheme is preferred by Investors who want to see their capital grow substantially and vest their money over a long period of time.
(Payout): Here the income earned by the investment is given to the unit holder as and when the declaration of payment is made by the fund. This is the dividend paid on the return. This income is tax free in the hands of investor. When the income is negative it is implied that no dividend will be declared. This scheme suits people who have invested with the purpose to earn from the investment at regular intervals.
(Reinvestment): In this scheme the dividends declared are reinvested into the fund at the prevailing NAV with the consent of the Investor. The dividend reinvested can be claimed as tax deduction by the investor as it is considered as fresh investment. This kind of investment is made when the investor wants to take advantage of the prevailing market situation or avail the tax deductions available.
Features of ELSS
- Funds are managed by professionals hired by the Asset Management Companies.
- Tax Deductions are available on the investments made under this Scheme.
- The lock in period of 3years is the minimum among other Tax saving Schemes (NSC, PPF etc).
- It is market linked and in the long run returns are better compared to NSC and PPF.
- It can be started with minimum investment of Rs 500/- per month.
- Income earned from the investment is Tax Free.
It is very simple. If you have a demat account then you can invest online in ELSS of your choice through it as per your choice. You can also invest through offline mode from your respective bank a/c which offers facilities to invest in ELSS.
In my upcoming posts you will get to know about the performance of different ELSS and other Mutual Funds.