Wednesday 25 March 2020

ELSS – Why they are a must in your portfolio?

Mutual Funds have taken over the financial world. While most people invest in mutual funds with the hope to grow their money and meet their financial goals, there is one more important aspect that some mutual funds take care of – reducing your tax burden. ELSS are tax-saving mutual funds that are eligible for tax exemptions as per the Income Tax Act. 
How ELSS Funds work?
Equity Linked Saving Scheme or ELSS are diversified open-ended mutual funds that predominantly invest in equity and equity-related instruments. As per the SEBI Regulations, these schemes need to mandatorily have 80% equity exposure. ELSS Funds invest across market segments (large-cap, mid-cap, and small-cap) and industries. The core objective of these schemes is to maximize wealth appreciation in the long run.
ELSS Mutual Fund Benefits
So, are you wondering why you should include this tax-saving mutual fund in your portfolio? Read on. 
There are a lot of ELSS Mutual Fund Benefits wherein only the top five reasons are listed here. Read to know why you should consider investing in these mutual fund schemes.
  1. Tax Exemption
The biggest advantage of these schemes is that they qualify for tax-deduction as per Section 80C of the Income Tax Act. You can claim a deduction against investment in ELSS up to Rs. 1.5 Lakhs in a financial year.

  1. Higher Returns
ELSS Funds have the potential to generate the highest returns amongst all tax-saving instruments. ELSS returns are market-linked and their high equity exposure enhances their return generating capability, especially in the long run. In the last three years, these funds have generated about 13.18% returns, making them the most lucrative (financially) tax-saving option.

Additionally, these schemes offer better post-tax returns. Long-term capital gains till Rs. 1 lakh (per fiscal year) are exempted from tax. The gains over that limit are taxed at 10%. Short-term capital gains carry a tax rate of 15%. Higher returns coupled with better tax rates give double benefits to investors.

  1. Shorter Lock-in
Investments in ELSS have a mandatory lock-in period of three years as compared to the other products eligible for tax deduction under section 80C. Thus, compared to other tax-saving alternatives, this is the shortest lock-in period. This is one of the most important of the ELSS Mutual Fund Benefits.

A look at this below table will help you do the comparison:

Tax-saving instruments
Lock-in Period
Bank FDs (qualifying for tax exemption)
5 Years
National Saving Certificates
5 Years
ULIPs
3 years
Life insurance policies
Minimum  of 5 years
PPF
15 Years (partial withdrawals are allowed from the 7th year)
NPS
Till retirement


  1. Professional fund management
One of the reasons mutual funds have become a preferred investment choice for investors is that they are professionally managed by financial experts. Fund managers are well-equipped with technical and market knowledge to make the best decisions for the investor’s portfolio. This becomes easy after you understand how ELSS Funds work.

  1. Flexibility
ELSS Funds offer a great deal of flexibility to investors. For example, investment in Public Provident Fund cannot exceed Rs. 1.5 lakhs in a year. There are no such restrictions on ELSS investments. Additionally, unlike ELSS, other-tax saving instruments come with an end date. Hence, you can continue to invest money in ELSS and link them to a specific financial goal.
So, once you understand how ELSS Funds work, the next question becomes extremely important.
So, how do you choose the right ELSS fund?
These factors can help you select the best ELSS Fund for your portfolio.
  1. Fund House’s track record
    A good fund house can make all the difference to your investments. Look at the track record of the fund house, quality of fund managers, research capabilities, etc.
  2. Returns
    A good fund should be able to perform consistently well in absolute terms as well as in comparison to peers and benchmarks.
  3. Costs
    Every fund houses levy a charge for managing the investor’s money. It is expressed in the form of a percentage and is known as the expense ratio. Higher is the expense ratio, lower is the net income for the investors.
  4. Financial parameters
    Some financial ratios also help you in choosing the right fund. Factors such as standard deviation, alpha, beta,  Sharpe ratio enables you to understand the risk profile of funds.

Final Words

The wide range of ELSS Mutual Fund benefits makes them an all-rounder. They help to prevent tax outflows as well as grow your corpus. If you stick with them for a long time period, they have the potential to make you a very happy investor.

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