What are ELSS?

There are many different types of mutual funds available in the market to invest in depending on your risk profile. These include equity mutual funds, debt mutual funds, hybrid mutual funds However, there is one special type of mutual fund which is linked to income tax. This type of mutual fund is called Equity Linked Savings Scheme or ELSS.

What is ELSS?

ELSS is an equity mutual fund which gives the investor a tax benefit. The tax benefit is in the form of a tax deduction under Section 80C of the Income Tax Act. This deduction is capped at Rs. 1,50,000. Any investment in a tax saving mutual fund or ELSS can get a deduction under Section 80C.

However, ELSS has a lock in period of 3 years. This means the funds invested in an ELSS are locked in for a period of 3 years from the date of investment. After 3 years are complete, the investor can withdraw the amount invested. If investments are made in instalments, then the withdrawal happens on first in first out basis.

Any exit you make from an ELSS also gets a moderate tax benefit, since any gains below Rs. 1 lakh do not attract long term capital gains. ELSS shows higher returns as compared to other tax saving investments and has the lowest lock in period.

ELSS funds are usually equity schemes. The funds have the freedom to invest in a mix of different shares i.e it can be classified as multi cap. Generally, however, ELSS funds tend to invest in large cap funds which give a stable return as compared to small caps and mid caps. You can decide to opt for dividend payouts or the growth option where dividends are reinvested in your holding and your investment increases.

How to invest in ELSS?

Investing in ELSS is similar to investing in a mutual fund. You can make a lumpsum investment or invest through Systematic Investment Plans (SIP). When you invest in SIP, you invest a fixed amount at a fixed interval for a certain period of time. You can have SIP once, twice or four times a month. On the other hand, lumpsum investment is a one time investment. If you invest in SIP, your cost for the year gets averaged.

How to choose the right ELSS to invest in?

The best SIP to invest depends on how the fund is performing. You can choose the right ELSS fund based on:

  • Relative risk of the portfolio
  • Expense ratio of the fund
  • Financials of the fund

Once you choose the fund, you can get the SIP started. The SIP automatically gets debited from your bank account for the period that you choose which means that once you start investing in an ELSS, you do not have to worry about making regular payments.

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