Personal Finance

Benefits Of Investing In ELSS Funds

May 18, 2020

Benefits Of Investing In ELSS Funds

Across the Section 80C spectrum of tax-saving options, Equity Linked Saving Scheme (ELSS) is one instrument that has gained popular acceptance among investors who wish to save tax.
You can claim tax deductions of as much as Rs 1.5 lakh through contributions to the ELSS Funds. In addition to this, your systematic investments to ELSS Funds can grow up to become a huge corpus for your financial goals.

Let’s have a look at the key benefits of investing in ELSS funds.

Higher return generating potential

ELSS Funds invest a major portion of your invested capital in equity shares and equity-related instruments of companies that span across different sizes and industry sectors. These funds have a lock-in period of 3 years; that provides ample time to the fund manager to take investment calls with a comprehensive outlook. You get to earn higher returns on your investment that beats inflation and helps you to accumulate a larger corpus for your financial goals in the long run. If you plan to stay invested for five years or even beyond and want to save taxes on the go, ELSS funds could be a sound investment option.

Lowest lock-in period

If you compare the various tax-saving options like PPF, NPS and the likes that are available under Section 80C, ELSS Funds have the lowest lock-in period of 3 years. In fact, ELSS is the only open-ended equity fund that comes with a lock-in period. It means that it is mandatory for you to stay invested for 3 years from the date of joining the fund. Once the lock-in period gets over, you get the flexibility to continue or redeem your ELSS investments. But since equities have the potential to generate higher returns over a period of 5 years or more, you would be better off to continue your SIPs for the entire duration of your pre-planned investment horizon.

Wide range of ELSS Funds to choose from

The availability of a broad array of ELSS Funds, on one hand, may help you in choosing a fund that fits your individual requirements. On the other hand, it may confuse others, making them pick an inappropriate fund. Even though ELSS Funds allocate a majority of their corpus towards equity, you need to understand that two ELSS Funds would be totally different in terms of their portfolio composition. There might be funds that invest highly in large-cap stocks, while there would be others that are more inclined towards mid-cap and small-cap stocks. A different asset allocation would also make the risk profile of both the funds different. The former would be less risky than the latter ones. Thus, remember to examine the fund portfolio before investing in one to make sure that the fund suits your risk profile.

Ease of investing via SIPs

ELSS Funds offer you the option to invest via lump sum as well as SIP. While you may choose to invest a lump sum amount in the fund, investing through the SIP route is a much effective way as it allows you to save and invest smaller amounts regularly. Also, it takes away the worry of timing the market and brings down your overall cost of investment through rupee cost averaging. You need to understand that you can invest as much as you want in an ELSS Fund but you can claim a maximum tax deduction of up to Rs 1.5 lakh only under Section 80C. You may continue your SIPs even after the expiry of the 3 year lock-in period to generate more wealth for your goals.

Flexibility to step-up your SIP and Switch

You get to enjoy a lot of flexibility in managing your SIPs in ELSS Funds. You may start investing in the fund with a small amount of SIP and later proportionately step-up/increase the amount of SIP as your income increases over time. This way you won’t feel the burden of investing and also it will speed up your wealth creation process. In addition to the step-up option, you may also want to switch your investments to a different ELSS Fund if your existing fund does not perform as per your expectations.

Conclusion

ELSS Funds indeed offer you a number of benefits in addition to the tax advantage. To get the most out of your investments, try to link them with other financial goals apart from the initial goal to save taxes. If you want to invest in an ELSS Fund, then Paytm Money can help you with choosing from the option of top-rated funds that also match your risk profile. Simply, download the Paytm Money App today, enter your PAN and become investment-ready within minutes.