Save and Grow with ELSS

One of the most preferred taxing saving funds under Section 80C of the Income Tax Act is ELSS which stands for Equity Linked Savings Scheme.

The investors need to be aware of the allocation mechanics of the fund. 80% of an ELSS’s fund is invested in equity and equity-related instruments. The rest of the funds summing up to 20% are allocated in fixed-income or government securities or corporate bonds.

The above dynamics and churning of the allocations, be it, the selection of equity stocks or bonds in the journey of a fund are usually overseen by a fund manager who charges a certain fee for his/her expertise.

Just like a fund manager who always prioritizes the goal of the fund which is to make investors happy with a reasonable return and the investors should also be prudent about the risk level in the fund as the crux of the investment lies in equity-related instruments.

What’s a Risky ELSS?

ELSS with a high-risk level has more exposure to small-cap stocks whereas moderately risky ELSS are heavily invested in large-caps.

Word of advice- keep a vigil on the poor management, if any, by the fund manager. When a fund manager constantly and mindlessly churns the portfolio the investor has to bear the brunt of expenditure on fees.

Among its peers under Section 80C, ELSS also offers the highest returns besides helping investors make use of tax deductions. It is also important for investors to know the strong ‘pros’ and easily manageable ‘cons’ of investing in ELSS.

Pros

1. Tax Saving: Under section, 80C ELSS is the unique equity fund that allows investors to get tax benefits up to ₹1,50,000/- on a maximum investment of ₹12,00,000/- in a financial year. The investors need to note that for the tax benefit of 1.5 Lakh, the benefits from other schemes like Public Provident Fund (PPF), and National Savings Certificate (NSC) are considered. If the amount of the total benefits to 1.5 lacks ELSS won’t be fruitful for an investor.

2. Lock-in Period: ELSS funds have the shortest lock-in period of three years when compared to other tax saving schemes like the Senior Citizen Saving Scheme(SCSS), Sukanya Samriddhi Yojana (SSY), etc. This encourages the investors to start as early as possible to save and grow and generate a compounded return on the wealth.

Cons

1.Risk level: Unlike tax-saving schemes like fixed deposit or PPF, a major chuck of investor`s money is parked in equity and equity-related instruments and automatically risk mimics that of a stock market. Investors should not waver from the financial goal and also choose an apt investment plan based on risk appetite.

2.Too Many ELSS Funds: Is one ELSS fund enough or you should invest in more? How many should you ideally buy? What to do when you have too much of exposure to ELSS funds in your portfolio?

When ELSS funds are so advantageous it is only natural to have such queries. Well, the answer is, to avoid too many ELSS funds in your portfolio.

Some investors are too focused on saving tax and overlook the risk level or other aspects like adding too many ELSS funds from different AMC. Too many ELSS create over-exposure and make the portfolio risky. Therefore, to keep the returns stable the investor needs to diversify the portfolio.

Tips and Tricks to use ELSS effectively:

High returns: Investors should extend the investment horizon for more than three years and over a decade ELSS fund would outperform other tax saving schemes by a huge margin.

Convenience: There are two modes of investment, one is to invest in one go which is a lump sum mode. SIP or a Systematic Investment Plan where small and regular amount trickle into mutual funds is a lucrative way, especially for salaried employees. When the markets are under the grip of bears it is always advantageous to start investing in SIP and buy units at appropriate NAV because the investor can bring down the average cost of purchase. This way investors can never start on the wrong foot by investing a lump sum when the markets are at the peak of a bull market. Just like the investment cycle that is locked in for three years, the mode opted for the purchase of ELSS fund, lump-sum, or SIP is locked in too.

The trick is to start early

A young tax-paying citizen who has just started working and with many decades to go before retirement can tap into the double advantage of ELSS funds ie tax benefits and compounding wealth.

But even investors with a decade left for retirement can consider ELSS as an option if he/she has the desired risk appetite. Thus, ELSS can be part of every tax-paying citizen regardless of age or risk preferences or any other liabilities like home or education loans. In the latter case, the old tax regime may be more appropriate.

Impact of Budget 2023-2024

There are various reforms to the new tax regime in the budget. The personal income tax rebate threshold is increased to 7 lakhs from 5 lakhs. But many experts say these changes would make ELSS funds less fancy, especially among people with taxable income up to ₹7 lacs.

Despite the new changes in the budget, ELSS schemes are still a great investment option to diversify the portfolio, have tax benefits, and also to grow investments for the long term due to equity exposure.

Conclusion

As we have seen, ELSS funds can be very profitable and help save taxes but there are a few limitations that investors must keep in mind before starting their investment journey in ELSS. ELSS funds are attractive avenues for young investors with a long-term horizon. ELLS funds are apt for those who are looking to seek exposure to the stock markets if their portfolio is light on equities and also to save tax under section 80C.