Equity Linked Mutual Funds

An ordinary investor may be overwhelmed at the prospect of tax planning in the beginning. Equity Linked Savings Scheme (ELSS) offers a simple solution. Not only will you be getting tax benefits but you will also be getting an opportunity to gain from the potential of Indian equity markets simultaneously.

First, you must know what ELSS is. ELSS, in simple terms, is a type of equity mutual fund with a lock-in period of three years, which is the shortest lock-in period compared to other tax saving options. It receives tax exemption under section 80C of the Income Tax Act. In fact it is one of the best avenues to save in this manner. What’s more, the scheme comes with the twin-advantage of tax benefits and capital appreciation. The investor also has the benefit of investing in the equity markets. Another important thing to note is that no tax is charged on the long-term capital gains from these funds.

The two ways to invest in ELSS is either to invest a lump sum (at any point of time) or to invest a fixed amount each month through systematic investment plan (SIP) in ELSS. If you choose the second way of using SIP, you will successfully reduce the burden of large investment towards the end of financial year.

Why go for SIP route? It is particularly useful to invest on a regular basis through SIPs. SIP allows you to invest small amounts of your savings in mutual funds at regular intervals. It is a planned investment programme. It is also possible to take advantage of the fluctuations in the stock markets with SIP thanks to rupee cost averaging. You can also benefit from compounding.

Comparing ELSS to other saving schemes:

Parameters PPF NSC ELSS
Tenure 15 years 6 years 3 years
Minimum investments Rs.500 Rs.100 Rs.500
Returns (Compounded Annually) 8.80 % ^ (Compounded half-yearly) 8.60 to 8.90 % ^ Not assured dividends/ returns
Amount eligible for deduction under Section 80C Rs.1,50,000 Rs.1,50,000 Rs.1,50,000
Maximum investments Rs.1,50,000 No limit* No limit*
Taxation for interest Tax free Taxable Dividends and capital gain tax free
Safety/ Rating Highest Highest High Risk

Advantages of ELSS when compared to PPF and NSC:

  • The most attractive feature is the short lock-in period.
  • There is an option when the investor can go for dividend option gain during the lock-in period
  • Earning potential is high since it is an equity linked scheme
  • Systematic Investment Plan can be opted for

Disadvantages of ELSS

  • Compared to NSC and PPF, the risk factor is very high

GST rate of 18% applicable for all financial services effective July 1, 2017.

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