In most cases, equity investors are very cautious about the market downsides and losing money in the market. Smart investors, on the contrary, are more focused on saving money, taxes, and investing with a longer-term perspective.
This is where the ELSS or Equity-Linked Saving Scheme comes in!
ELSS is best suited for investors wanting to save tax. These funds primarily invest the majority of their corpus in equity or equity-related products. Further, they also offer the advantage of tax deduction of up to Rs 1.5 lakhs per year. With the shortest lock-in period of three years, ELSS funds are preferred among all investment avenues.
This post explores more about ELSS funds and why you need them in your investment portfolio.
Types of ELSS
ELSS funds are mainly classified into dividend funds and growth funds.
- Growth Fund-Growth funds offer a long-term wealth creation platform for investors where the entire value of the fund is realized at the time of redemption.
- Dividend Payout -Dividend payout funds have two sub-categories – Dividend Payout and Dividend Reinvestment. The former will give you tax-free dividends, whereas, in the case of the latter, your dividends will be reinvested as a new investment.
Top Reasons Why You Need ELSS Funds in Your Portfolio
- Lock-in period
In terms of performance, all good mutual fund portfolios are generally made for long-term investments but are not bound with lock-in periods. Investing in ELSS, on the other hand, comes with a lock-in period of at least three years. This means that you mandatorily need to stay invested for three years or more to be exempt from taxes applicable on the returns of these funds. This helps to bring in a discipline for staying invested for a longer period.
- Tax benefit
One of the key reasons to have an ELSS tax saving fund in the portfolio is to save tax. All investments in ELSS schemes qualify for tax deduction under Section 80C of the Income Tax Act of 1961. However, any dividend or long-term capital gain earned by the investor is exempted from income tax.
- Opportunity to invest in equity schemes while saving
ELSS funds also give you the benefit of riding the growth cycle of equity mutual fund stocks in your ELSS portfolio. While saving in traditional instruments can give you about 8% of returns, investing in equity schemes may produce much higher returns in favorable situations in the stock market. Having a good portfolio with quality ELSS stocks may allow you to reap higher returns in the long term.
- Ride the long-term value growth
Another reason you should have ELSS funds in your portfolio is that even with a 3-year lock-in period, ELSS schemes allow the continued growth of your investment for an extended period or give you the option to redeem after three years. So, even though these funds invest your money in equity, you enjoy higher chances of better returns with tax exemption.
- Inculcate investment discipline and saving habit
ELSS schemes are a popular option that allows investors to invest systematically with as low as Rs. 500 per month, thus turning your small savings into your investments. This fosters both investment discipline and also a habit of continuous investing. Since there’s a lock-in period of three years, starting a SIP in Equity Linked Saving Schemes gives you the advantage of the returns on your SIP amount every month after three years of the first investment.
Investing in ELSS funds is a smart and effective way to save taxes as compared to the other options available under Section 80C of the Income Tax Act, 1961.
As an investor looking to balance your portfolio with ELSS funds, PGIM offers you one of India's best investment platforms. The user-friendly platform gives investors access to ELSS funds from leading fund houses in India. It makes investing in ELSS schemes super simple and serves as your one-stop shop to build wealth over some time.