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What is an Equity Linked Saving Scheme? Research Team | Posted On Thursday, April 25,2013, 05:42 PM

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What is an Equity Linked Saving Scheme?



Aren’t there those times when we see all those beautiful and pricey items in a mall and say. Oh if only we could purchase them, Things are so costly these days. I have no money in my pocket. All my money gets spent literarily before it reaches my pocket. What Should I do About This?, Fortunately the Government of India encourages savings and we have Equity Linked Saving Schemes which are tax deductible as per Section 80C of the Income Tax Act. Mustn’t we all make use of this unique instrument in order to not only save our taxes but also increase our returns over a time frame.Here I would like to remind you that the team of Financial Planners at is always ready to plan your tax saving needs in an efficient manner, You can explore this unique free advisory service by giving a missed call at 02261816111.

What Are Equity Linked Saving Schemes?

This is basically a dedicated mutual fund scheme which investment in Equity Linked Saving Scheme and comes with a lock-in period of 3 years. Here you can invest a sum of INR 1.5 Lakh in an ELSS Scheme and claim deductions under Section 80C of the income tax act of 1961.

  • Here we have a tax deductible limit of INR 1.5 Lakh as per Section 80C of the income Tax act.
  • This does not depend on how much you earn and under which tax bracket you fall.
  • The dividends earned on ELSS are tax free in the hands of the investors.
  • The returns at maturity are tax free in the hands of the investors.
  • These ELSS Funds have a lock in period of 3 years and are not usually accepted as collateral for loans.
  • An ELSS is an Equity Oriented fund where the bulk of the corpus is invested in Equities.
  • There is no Upper limit you can invest in an ELSS Scheme.

See Also: How to Invest in ELSS?

Are You Faint Hearted?

If you are then Equity Linked Saving Schemes are not your “Cup Of Tea”. Here if you noticed in the year 2008 after the USA Sub prime lending and Mortgage Housing crisis the market was in shambles. The market rose like a phoenix subsequently after 2009 and this was followed by the Sensex reaching very high levels of 19000 to 20000.We had a phenomenal rise in the prices of commodities such as Gold and Crude oil in this period. There is a general belief that in the years to come the commodities and inflation levels will come down which will help improve our Current Account Deficit and improve our GDP. We recently saw a crash in the price of Gold and other commodities..A person who has stayed invested in the market knows about the ups and downs that exist in the markets. Here  longer we stay in the market greater would be our gains, Here since ELSS have a lock-in period of 3 years they are able to tap the benefits of staying invested in the market. So it is very necessary not to lose heart when market returns crash and an ELSS can be retained by the investor even after its lock in period has lapsed.

Slow And Steady Wins The Rat Race:

Here the market has been very volatile in the last 5 years. Here even if we are going for the tax saving benefits of an ELSS it is better to follow an SIP (Systematic Investment Planning)  where small  portions of investments are made say on a monthly basis for a period of one year with amounts around INR 3000 per month. This translates to an investment of INR 36000 per annum which goes towards the tax saving deductions as per Section 80C. During the period of one year the market might have fluctuated and been highly volatile in this period. However as we stay invested over a long period of time we are able to reap the benefits of these Equity Linked Mutual Funds. This is much better than investing a lump sum in a single month as the market value may be very high in that period.

How To Choose The Right ELSS Fund?

We can also do our own analysis in order to arrive at the best ELSS Fund. Choose an ELSS which has a track record of 3-5 Years in order to study the historical returns. Choose funds with an asset base of over 300 Crores. Compare the returns of the top ELSS mutual funds over the past year, Then go back and compare the returns over a three year period. This method helps us to arrive at the conclusion of which is the best fund for us to invest in.

Here we have morning star and lipper which use a ranking based method in order to arrive at the best fund for the investor to invest. Morning star uses star based rating technique where the best funds are accredited a 5 star or a 4 star rating. Here Lipper uses the benchmark technique, Here we compare the ELSS which is primarily an equity oriented mutual fund to a benchmark index such as S & P CNX Nifty. Here we measure how the ELSS Fund has performed vis a vis the benchmark.

Growth Vs Dividend: Which Is A Better Option?

Under the Dividend Option the income from the ELSS is in the form of Dividends. Here the dividends are declared by the funds and are tax free in the hands of the investor. Most of the ELSS Schemes use this as a marketing tool in order to garner investments. They declare dividends in the Quarter of January To March. This encourages the investors to put their tax deductible income in such kinds of funds.

Here in the Growth Option the returns earned are reinvested in the scheme. This increases the NAV of the fund and we get higher returns for our investments. Since a large proportion of youth are in the tax saving bracket they should go for the Growth Option as this will result in huge savings along with returns for them.

See Also: ELSS Saves Tax And Makes You Wealthy

What Are the Advantages of ELSS Scheme?

Short Lock In Period Compared To Other Tax Saving Instruments:

We have an ELSS Scheme which has a shorter lock in period when compared to a PPF or an NSC. Here imagine the plight of a fund manager who has to make redemptions on a daily basis. How will he manage the fund? Here the lock in period prevents short term money from flowing into these funds. Here short term money looks for quick returns and will not consider a lock in of 3 years. This helps the fund manager to stick to his goals and targets and return value for the investments put in.

Method To Get Equity Exposure:

Here we get tax deductions under Section 80C along with higher returns than say certain other equity related financial instruments. Here ELSS have a long time horizon and tend to perform better than Equity Diversified mutual funds over long periods of time. They are also better than plain Equity funds as they combine tax benefits along with good returns. Here generally it is not advisable to time the markets. However in periods when the market is down but the outlook positive it is good to invest in an ELSS.

Ceiling Limits

Here the returns of the ELSS are governed by market related forces. The returns here are higher without any upper limit or a ceiling. However in PPF, NSC and so on the returns are fixed.

Here an ELSS is like a gift from the government to the youth of the country. This not only has tax saving benefits but also gives good returns. Let us not look this “Gift Horse In The Mouth”. Now it is up to us to make use of this horse by riding it. We do need to do the groundwork and analyse and choose the best ELSS to tap these returns. You can look up the website in order to learn about ELSS and your tax saving needs.

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