ELSS FUNDS
Equity-Linked Savings Scheme (ELSS) funds are a type of mutual fund that primarily invests in equity shares of companies listed on Indian stock exchanges. ELSS funds provide tax benefits under Section 80C of the Income Tax Act, making them a popular investment option for individuals looking to save on taxes while investing in the stock market.
Here's everything you need to know about ELSS funds:
What are ELSS Funds?
ELSS funds are open-ended mutual funds that primarily invest in equity shares of companies listed on Indian stock exchanges. They are one of the tax-saving investment options available under Section 80C of the Income Tax Act. ELSS funds have a lock-in period of three years, which means that investors cannot withdraw their investments before the end of the lock-in period.
How do ELSS Funds work?
ELSS funds pool money from investors and invest it in equity shares of companies listed on Indian stock exchanges. The fund manager of an ELSS fund selects the stocks to invest in based on the fund's investment objective and investment style. The fund manager aims to generate long-term capital appreciation for the investors by investing in high-quality stocks that have the potential to grow over time.
ELSS funds have a lock-in period of three years, which means that investors cannot withdraw their investments before the end of the lock-in period. This lock-in period helps ELSS funds generate better returns over the long term by reducing the impact of short-term market fluctuations on the fund's performance.
Tax Benefits of ELSS Funds -
ELSS funds offer tax benefits under Section 80C of the Income Tax Act. Investors can claim a deduction of up to Rs. 1.5 lakh per year from their taxable income by investing in ELSS funds. This means that if an investor invests Rs. 1.5 lakh in an ELSS fund in a financial year, they can claim a deduction of Rs. 1.5 lakh from their taxable income.
ELSS funds also have a lower tax rate on long-term capital gains compared to other equity mutual funds. Long-term capital gains from ELSS funds are taxed at 10% if they exceed Rs. 1 lakh in a financial year. This is lower than the tax rate of 15% on long-term capital gains from other equity mutual funds.
Benefits of ELSS Funds -
Tax Benefits: ELSS funds offer tax benefits under Section 80C of the Income Tax Act. Investors can claim a deduction of up to Rs. 1.5 lakh per year from their taxable income by investing in ELSS funds.
Potential for High Returns: ELSS funds primarily invest in equity shares of companies listed on Indian stock exchanges, which have the potential to generate high returns over the long term.
Professional Management: ELSS funds are managed by experienced fund managers who have the knowledge and expertise to select high-quality stocks and generate long-term capital appreciation for the investors.
Diversification: ELSS funds invest in a diversified portfolio of stocks, which helps reduce the risk of investing in a single stock or sector.
Lock-in Period: ELSS funds have a lock-in period of three years, which helps generate better returns over the long term by reducing the impact of short-term market fluctuations on the fund's performance.
Types of ELSS Funds -
There are two types of ELSS funds based on the investment style:
Growth-oriented ELSS Funds: Growth-oriented ELSS funds invest primarily in stocks of companies that have the potential to grow in value over the long term. These funds aim to generate capital appreciation for the investors by investing in high-quality growth stocks.
Value-oriented ELSS Funds: Value-oriented ELSS funds invest in stocks of companies that are undervalued by the market and have the potential to increase in value. These funds aim to generate capital appreciation for the investors by investing in stocks that are trading at a discount to their intrinsic value.
Risk and Return -
ELSS funds are equity-oriented mutual funds, which means that they carry a higher risk than debt-oriented mutual funds. However, they also have the potential to generate higher returns over the long term. Investors should carefully evaluate the risks and benefits of investing in ELSS funds before making any investment decisions.
ELSS funds have generated average returns of around 12-15% per year over the long term. However, past performance does not guarantee future returns, and investors should be prepared for fluctuations in returns due to market volatility.
Investment Process -
Investing in ELSS funds is a simple and straightforward process. Investors can invest in ELSS funds through online platforms or by visiting the nearest branch of the mutual fund company. Investors need to complete the KYC process and submit the necessary documents to invest in ELSS funds.
ELSS funds also offer the Systematic Investment Plan (SIP) option, which allows investors to invest a fixed amount at regular intervals. This helps investors to invest in a disciplined manner and benefit from the power of compounding.
Conclusion -
ELSS funds are a popular investment option for individuals looking to save on taxes while investing in the stock market. They offer tax benefits under Section 80C of the Income Tax Act, the potential for high returns, professional management, diversification, and a lock-in period of three years. However, investors should carefully evaluate the risks and benefits of investing in ELSS funds before making any investment decisions. It is also important to choose the right ELSS fund based on one's investment objectives, risk appetite, and investment style.
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