India is one of the world’s youngest nations. As they are the current generation in the workforce, they are the current generation of investors. While some allocate a portion of monthly income to traditional investment options, others invest in mutual funds and their different variants monthly. One of the mutual fund types is ELSS, which is a tax-saving mutual fund.
What is ELSS?
An ELSS mutual fund or equity-linked savings scheme is a type of equity fund that invests in equities or related securities. These funds are tax-saving schemes as you can enjoy a tax exemption of up to ₹1.5 lakhs from annual taxable income under Section 80C of the Income Tax Act.
An ELSS mutual fund invests approximately 65% in equities and equity-linked instruments like listed stocks. Also, some ELSS funds enjoy exposure to fixed-income securities. These funds have a lock-in period of three years, which is the shortest among all Section 80C investments. Here are a few reasons that a millennial should consider investing in ELSS funds:
- Dual benefit:
ELSS mutual funds are multi-cap funds, meaning they invest in companies of all market capitalisations, i.e., they allocate funds to small-, mid-, and large-cap businesses. Furthermore, these funds also invest in businesses across all sectors. As they invest in equities, ELSS schemes can create massive wealth over time through equities.
Apart from higher returns, ELSS also offer tax benefits. By investing in equity-linked savings schemes, you can claim up to ₹1.5 lakh as tax deduction under Section 80C of the Income Tax Act. This benefit is provided only by ELSS funds. Thud, ELSS investments offer the twin benefit of acquiring substantial wealth over time and tax deductions.
- Shorter lock-in:
These schemes have a shorter lock-in tenure than other tax-saving 80C investment options. By juxtaposing the lock-in tenure of ELSS with other tax-saving investment options, you will observe that the three-year lock-in period of ELSS is comparatively shorter. For instance, the lock-in period for PPF is 15 years, Unit Linked Insurance Plans have a lock-in of 5 years, and NSCs have a lock-in of either 5 or 10 years. The short lock-n period is an advantage for the investors.
- Investment mode:
Apart from the lump sum, you can invest in ELSS through the SIP mode. You can start with a small amount through the SIP mode and gradually increase your investment with subsequent salary hikes. To determine the monthly investment amount, use an online mutual fund calculator.
- Inflation-beating returns:
Equity-linked saving schemes primarily invest in the equity market. Hence, these funds can earn higher returns, another reason young professionals are attracted to ELSS investments.
ELSS investments have different benefits and flaws. Ensure that personal investment goals align with the fund objective. Simultaneously, your investment horizon and risk appetite. Studying the market conditions can help you enjoy higher returns through an ELSS fund investment.