Equity Linked Saving Scheme or the ELSS Funds becomes a point of discussion only during the fiscal ending as everyone starts exploring avenues to save tax. But, ELSS is not just only a tax saving instrument, its more than that and offers a significant advantage to investors.
In my view, it should be looked upon as an investment tool which has the advantage of tax saving.
What are ELSS Funds?
ELSS Funds are tax-saving mutual funds which invest the majority of its asset in equity assets just like any other equity fund. The only difference from equity funds is that it has a lock-in period of 3 years.
After the lock-in period, your investments become open-ended and you have the option to redeem or continue with the investments.
The asset composition of ELSS funds are not concentrated on companies of distinct market capitalization, but it spreads over companies of different market capitalization. Therefore, ELSS Funds can be termed as multi-cap funds.
Why Invest in ELSS?
ELSS Funds are the best alternative to any current traditional tax saving plans such as PPF, NSC, Infra Bonds and has the lowest lock-in period in the category. And, the returns percentage is also higher compared to the traditional tax saving instruments.
For example, the return percentage ELSS Funds averages between 15-18%, which means it takes slightly less than 5years to double your capital. Whereas, traditional tax saving instruments offer returns between 7-8.5%, taking somewhere around 8.5 to 10 years to double your income.
What are the Tax Benefits Offered in ELLS Funds?
Investments in ELSS Funds are exempted under Sec 80C of the Income Tax Act, with maximum deduction allowed Rs 1,50,000.
As the fund has a 3 year lock-in period, gains from the investment are treated as long term capital gains (LTCG) and are taxed 10 per cent over Rs 1,00,000. Up to gains of Rs 1 lakh, the tax incidence is nil.
How Should You Invest in ELSS?
While investing, you should treat ELSS Funds just like any other equity funds and measure its performance statistics as per the latter.
In ELSS, you have the option to invest through SIP or through lumpsum, and its up to your discretion.
SIP will allow you to have a fixed monthly investment over a long period of time, thus enabling you to efficiently plan your tax savings and prevent the last minute rush. One thing to note with SIP investment in ELSS fund is that each month investment will have a 3-year lock-in period. For example, SIP investment made in Jan 2014, will have lock-in up to Jan 2017 and March 2014 SIP investment will have a lock-in up to March 2017.
Best ELSS Funds to Invest in 2019
|ELSS Funds||Assets ( Rs. Cr.)||Beta||Alpha||3 Yr Return||5 Yr Return|
|Motilal Oswal Long Term Equity Fund||1339||0.87||2.74||16.34||-|
|Axis Long Term Equity Fund||19109||0.95||0.69||15.23||18.05
|ABSL Tax Releif 96 Fund||8685||0.89||0.67||13.94||17.1
|Tata India Tax Saving Fund||1790||1.06||0.67||16.08||17.97
|IDFC Tax Advantage Fund||1996||1.01||0.71||16.38||16.51
Note: Returns shown are of Direct Plan as on 31st May 2019
It can be said that ELSS Funds are a great alternative to any tax saving instrument currently offered in the market. Not only tax saving, but the investments also help to beat inflation with greater returns, which is not possible with traditional plans.
However, to get the maximum benefit from ELSS investment, you should continue for a longer duration rather redeeming it at the end of the third year. One thing is to note, the risk associated with investing in ELSS is the same, that of investing in any other equity funds. Hence, risk-averse investors should study all the details before investing.