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Diversification is the key to a successful investment portfolio. By diversifying, you reduce your investment risk. The financial market offers a wide range of investment schemes where you can invest your money. One of the popular investment schemes is Equity Linked Savings Scheme or ELSS. ELSS scheme provides your portfolio diversification and helps in meeting your long term financial goals.

But before you invest, it is crucial to understand the meaning of ELSS and how they work.

What Is ELSS?

Equity Linked Savings Scheme or ELSS is a mutual fund investment scheme that invests a significant part of its fund in equity and equity-related securities. This investment scheme has a lock-in period of 3 years, and its returns are subject to market volatility. These funds are known to hold strong growth potential. You can invest in ELSS funds through a lump-sum payment or Systematic Investment Plan (SIP).

There are few things that you must know before investing in ELSS funds. Here we list down some of the points you must keep in mind before investing in these funds.

Things to Know Before Investing in ELSS Funds

If you are new to the equity markets or tentative about investing in equities directly, ELSS funds are ideal for you to start your investment journey. ELSS funds offer a perfect pathway to take exposure in the equities markets. The good part about investing in ELSS funds is that you can build a diversified portfolio with a low investment of Rs. 500 on a SIP or lump sum basis. Moreover, professional fund managers handle these funds, and there is no need for you to worry about market fluctuations.

  • Higher Returns

ELSS schemes have the potential to generate higher returns in comparison to other investment options. The performance of these funds would vary across the period. However, it would help if you did not keep any unrealistic returns expectations out of ELSS funds. Only when you invest money for a longer duration, the probability of making higher returns is more.

  • Lock-In Period

When you invest in ELSS funds, you cannot withdraw or redeem your money for at least three years. In other words, ELSS funds come with a lock-in period of a minimum of three years. The lock-in period of these funds is the shortest among the different tax saving schemes available in the market. After the lock-in period of these funds is over, you can either withdraw your money or hold on to your investments if you feel that the funds would perform well.

  • Tax Saving

ELSS funds are tax-saving instruments. They allow you to make gains from equity investments and provide you tax benefits under Section 80C of the Income Tax Act, 1961. You can invest up to Rs. 1,50,000 annually and claim deduction under Section 80C from your total gross income. You may invest as much money as you want in the ELSS funds, but you can claim tax deduction only up to Rs. 1,50,000. So it would be best if you plan your investments accordingly.

Many would argue that investing in equities is risky, making Equity Linked Savings Schemes also risky. However, one must not forget that investing in these funds is long term, i.e. at least three years. The longer duration protects the investors from market volatility. Moreover, you also get the tax benefits by investing in these funds. Therefore, the risk-reward ratio in ELSS funds is very favourable.

The above mentioned are some of the points that you must keep in mind before investing in ELSS funds. The best approach to investing in these funds is by making a detailed plan at the start of the financial year. When you know your financial goals, investing in suitable ELSS funds gets simple. If you are looking for capital appreciation, wealth creation, tax saving and diversification of your portfolio, ELSS fulfils all your needs. In case of any confusion in selecting the suitable ELSS funds for yourself, you may seek the help of financial experts and invest accordingly.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

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Published on: Tuesday, November 23, 2021, 09:29 PM IST