Equity Linked Savings Scheme, often referred to as ELSS, is an equity mutual fund scheme that comes with a three year lock in period and tax benefit. ELSS is the only mutual fund scheme that comes with tax exemption benefits. Equity mutual fund schemes aim at generating capital appreciation over the long term by predominantly investing in equity and equity related instruments. ELSS invests in large cap company stocks and select mid caps for income generation. If you take a look at other schemes that fall under Section 80C of the Indian Income Tax Act, 1961 ELSS probably has the shortest lock in period among others.
Here’s an example illustrating how ELSS can help save tax and earn long term capital appreciation –
Rahul Roy is a restauranter with an annual income of Rs. 15 lakhs. This lands him in the highest tax slab. Rahul learns about ELSS and decides to invest Rs. 1.5 lakhs in it. According to the Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs made in an ELSS scheme are eligible for tax benefits. So, by investing Rs. 1.5 lakhs in ELSS Rahul managed to bring down his gross taxable income to Rs. 13.5 lakhs. Also, since ELSS is an equity mutual fund scheme, the 3 year lock in period might help Rahul accrue some interest on the investment amount.
Are ELSS ideal for short term or long term?
Since ELSS is an equity oriented scheme, it takes some time for the fund to perform to its fullest potential. Expecting ELSS schemes to generate results over the short term may not be a good idea because these equity schemes fluctuate depending on the daily market movements. However, long term investing in equity schemes like ELSS funds has often resulted in the scheme outperforming other investment schemes like PPFs and bank FDs.
Should you sell your ELSS investments in the current market scenario?
ELSS schemes are high volatile tax savings funds that have a high risk returns tradeoff. Since you are going to have to pay taxes till you retire, you can continue investing in ELSS keeping a long term investment horizon. Also, if you start a monthly SIP in a ELSS scheme of your choice you will not have to worry about the existing market scenario. Equity markets can be volatile over the short term, but they have always generated decent capital gains in the long run. A monthly SIP ensures that you save and invest a fixed amount at regular intervals. Also, if you are wondering when to start an SIP, don’t worry as you do not need to time the market as any time is a good time to start a monthly SIP. Also, if you instruct your bank to allow auto debit, every month on a predetermined date, a fixed amount is debited from the investor’s savings account and electronically transferred to the ELSS fund.
Do not sell your ELSS investments in falling markets. Not only will you be selling an undervalued investment, you will only incur losses. Equity markets are ideal for long term investing and even if your ELSS investments are underperforming at the moment, give them some time. In fact, you can invest more in falling markets and receive more units as the NAV of the scheme will be low at the time. Receiving more units when the NAV is low and vice versa is referred to as rupee cost averaging, an investment technique that works in favor of investors over the long term.
ELSS funds are high volatile equity funds that do not guarantee capital appreciation. Investors are expected to talk to their financial advisor before investing.