Know the benefits and drawbacks of investing in ELSS funds

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© Provided by The Financial Express The equity-linked saving scheme invests in the stock market and the risk is similar to investing in the equity market.

Mutual funds are now being regarded as one of the best investment options. Experts say that is due to their higher returns along with tax benefits. Investments in MFs help in reducing one’s tax liability, along with helping the investment grow over the long term.

ELSS (Equity-Linked Savings Scheme) is one of such diversified equity mutual fund schemes wherein the savings are invested in equity markets and are usually looked at by investors to save tax while investing.

With ELSS a minimum of 65 per cent of the ELSS fund’s assets is invested in the stock market. Investments under ELSS are diversified and invested across sectors and industries, unlike other fund options such as sector funds, financial services, and infrastructure. ELSS investment qualifies for a tax deduction of a maximum of Rs 1.5 lakh per annum under Section 80C of the I-T Act.

Here are four benefits and drawbacks of investing in ELSS;

Benefits of tax saving mutual funds-

· Even though one can invest in ELSS from as low as Rs 500 up to any amount – an investment worth Rs 1.5 lakh is only eligible for tax benefits under Section 80C.

· These tax saving mutual funds come with a mandatory lock-in period of 3 years – the shortest among u/s 80C investment options while other investment options offer lock-in periods of 6 to 15 years.

· Investment in ELSS needs to be made for a minimum period of 3 years, therefore, any gains from the sale will be long-term in nature.

Currently, any gains above Rs 1 lakh are taxable at the rate of 10 per cent, wherein short-term capital gains are taxed at the rate of 15 per cent. Hence, ELSS funds attract lower tax expenses.

· According to experts, while investing in ELSS, investors should choose the SIP option, which will allow one to invest a fixed amount at regular or periodic intervals.

Drawbacks of ELSS –

· Total benefits are limited with this investment. For instance, even if an investor invests Rs 8 lakh in an ELSS fund in a current year, he/she will get tax benefits only for the amount of Rs 1.5 lakh under section 80C, irrespective of the total amount of investment made in the ELSS fund.

· Tax benefits are also limited with ELSS. Tax benefits only up to Rs 1.5 lakh are inclusive of other benefits under section 80C such as PPF, repayment of home loan principal, life insurance, among others. Therefore, if other deductions already amount to a sum of Rs 1.5 lakhs then no deduction for the investment in the ELSS scheme will be available to the investor.

· ELSS has a lock-in of 3 years and the money can’t be withdrawn before that. Unlike other investment options like bank deposits, PPF – under ELSS schemes, premature withdrawal is not allowed before the completion of the lock-in period.

· As the name suggests, the equity-linked saving scheme invests in the stock market and the risk is similar to investing in the equity market.