How ELSS Can Help you With Wealth Creation

As on 20th March 2020

If you ever considered investing in some financial instrument and visited online to look out for options, you must have been left astounded by the number of products on offer. That’s because every investor has a unique investment objective, and there are schemes available in the market catering to almost everyone’s investment needs.

But before you go ahead and invest your money in any scheme, it is advisable that as an individual, you have a defined financial goal. Individuals are expected to set realistic goals as it helps with financial planning. If you are looking for an investment scheme that doesn’t just give you an opportunity to invest in equities but also gives you a tax benefit, you may consider investing in the equity-linked saving scheme.

What is Equity Linked Saving Scheme?

ELSS or equity-linked saving scheme is an open-ended mutual fund that comes with a statutory lock-in of three years. This means you cannot redeem your ELSS fund units for at least three years. Investors with a long term investment horizon seeking exposure to equity markets may consider investing in this tax saver fund.

ELSS has several benefits to it, which might render in aiding investors in wealth creation. Here are some of them:

ELSS has tax-saving benefits: A lot of investors turn to ELSS because it has a tax-saving benefit. If you want, you can invest up to Rs. 1.5 lakhs* annually in an ELSS scheme and bring down your gross taxable income. As per Section 80C of the Indian Income Tax Act, 1961, investments made in tax saving instruments like ELSS are eligible for a tax deduction.

ELSS comes with a three year lock-in: ELSS has a short lock-in period among tax saving schemes. A three year lock-in means one cannot redeem their ELSS fund units for a minimum period of three years. Also, equity investments should be considered for long term investments; hence, if you wish, you can remain invested in this tax saver fund for more than three years.

ELSS is suitable for long term investment: Equity related schemes like ELSS are supposed to be considered for meeting long term financial goals like retirement corpus or planning your child’s future. That’s because investments made in the equity markets are prone to market volatility, and usually, investments made with a long term investment horizon stand a chance of beating obstacles like inflation and market volatility. Also, wealth creation might require an individual to have at least 15 to 20 years in hand. Hence it is better that one considers ELSS investments with a long term investment objective.

ELSS is available in lumpsum and SIP payment options: If one has surplus cash parked, which they don’t mind investing in equities, they may invest in ELSS with a lumpsum payment. When you pay in lumpsum, you pay the entire investment amount beginning of the investment cycle. This way, you stand a chance of receiving more units at the fund’s existing NAV. On the contrary, if you want to give your investments a systematic approach and invest in your ELSS fund at regular intervals, you may opt for the SIP option. Systematic Investment Plan or SIP is an electronic payment process where all you have to do is instruct your bank, and the money is debited from your bank account and transferred to your ELSS fund. SIP investors stand a chance of benefiting from compounding as well. Also, one can start investing in ELSS fund with an amount as low as Rs. 500 per month.

ELSS is available in growth and IDCW options: ELSS fund is available for investors in two kinds of schemes: Growth and IDCW. In the growth option, the profits scored by the scheme are invested back into the scheme. Gradually, this approach may result in the rise of the fund’s net asset value. But in the case of some market vagaries, if the scheme fails to perform, the NAV might decline, On the other hand, the IDCW option doesn’t invest the fund’s profits back into the scheme. Instead, investors have a payout option where these returns made by the scheme are distributed in the form of IDCW or bonuses to scheme owners from time to time. The amount and frequency of IDCW differ from time to time and are never guaranteed. Also, IDCW can only be declared when the scheme makes a profit and solely at the discretion of the fund manager.

ELSS is an equity-linked saving scheme and hence carries risk. Thus, it is better that investors understand their risk tolerance and only then consider investing in the tax saver fund. If you are someone who seeks long term capital appreciation and also wishes to save tax at the same time, you can take a look at Axis Long Term Equity Fund, an ELSS fund offered by Axis mutual funds.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS

Axis Long Term Equity Fund

An open-ended equity linked saving scheme with a statutory lock-in of 3 years and tax benefit

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully