ELSS or equity-linked saving scheme is a financial tool that is categorized under the diversified mutual funds. These investments are known to generate attractive returns as the maximum corpus are exposed towards equities and equity-oriented securities and the remaining part of the corpus is invested in debt.
Want to know more about Investment Planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial product.
ELSS funds give you the following benefits on investments:
See Also: ELSS: Smart Way to Save Tax
Any individual or members belonging to HUF can invest in ELSS. ELSS investments are best suited for people who can take a risk and have sound knowledge about equity investment and are willing to remain invested for a long time.
It is also apt for young investors who are in the initial stage of their professional careers as they can opt for a longer investment horizon. Starting investments early helps investors avail the benefit of compounding leading to high returns while saving taxes of up to Rs. 46,800 per annum.
ELSS is an attractive investment tool that combines features of a tax saving instrument as well as helps in the creation of wealth. This can be an ideal tool for people who have just started paying taxes.
You can invest any amount in ELSS as there is no prescribed upper limit on ELSS investments. However, you can avail of tax benefits on an amount up to Rs. 1.5 Lakh under section 80C per annum.
Also, the lock-in period of ELSS investments is only three years which is the shortest of all Section 80C avenues. Due to a compulsory lock-in of 3 years, fund managers have the liberty to take a long-term approach to the investment portfolios. The reason is there are no liquidity issues, unlike other equity investments. Due to this, the investment goals of the fund managers align with the investment goals of the investors.
Suppose you have a lump sum amount of 2.5 lakhs that you want to invest in. Of the total investment amount, you can get tax benefits only on Rs. 1.5 Lakh under section 80C. However, the main question is, should you consider investing the additional amount even if you cannot get tax benefit on it?
The answer is, ELSS investments come with a lock-in period of 3 years and this can prove to be a disadvantage when compared to diversified equity funds. And you will not be able to get any special tax benefits on surplus investments other than the standard tax benefit under section 80C. Therefore, should you invest additional funds for a 3-year lock-in without any tax benefits?
See Also: ELSS - The Best Tax Saving Scheme
To understand this, you must first remember that ELSS allocation should be part of your overall financial goals. The equity exposure should align with your overall financial plan and therefore you must take this approach based on how much equity exposure your plan allows you. In case you feel ELSS investment is overexposing you to equities, then you need to rethink your decision as you will be locked-in for a period of 3 years.
When you compare your returns with diversified equity funds you will find ELSS gives not so great returns. In fact, diversified equity fund investments will give you a greater advantage as you will have the flexibility to move your funds and invest elsewhere depending on your financial goals, risk appetite, and market volatility. Through this type of investment, you will be able to achieve relatively higher growth, unlike ELSS through disciplined savings.
Therefore, it is clear that investing above the 80C limit does not give many benefits to investors. The reason is the incremental benefits of the ELSS scheme over a diversified fund in terms of risk-return trade-off are quite negligible when the tax benefit is set aside. Further, it exposes you to liquidity risk without giving equivalent returns, unlike diversified equity funds. So as an investor it is better to invest only up to your tax-saving limit and divert any surplus funds towards diversified equity investments. At least, it will help you to rebalance your portfolio as you will not be tied to a fund due to lock-in periods.
You May Also Watch
Keep your Financial Cognizance up to date with IndianMoney App. Download NOW for simple tips & solutions for your financial wellbeing.
Have a complaint against any company? IndianMoney.com's complaint portal Iamcheated.com can help you resolve the issue. Just visit IamCheated.com and lodge your complaint. If you want to post a review on any company you can post it on Indianmoney.com review and complaint portal IamCheated.com.
Be Wise, Get Rich.
This is to inform that Suvision Holdings Pvt Ltd ("IndianMoney.com") do not charge any fees/security deposit/advances towards outsourcing any of its activities. All stake holders are cautioned against any such fraud.