What is ELSS mutual funds?
Are you looking for a smart investment strategy that can potentially maximize your returns while helping you save on taxes? Enter the world of ELSS (Equity Linked Saving Scheme) mutual funds. Offering the perfect blend of long-term capital appreciation and tax benefits under Section 80C of the Income Tax Act, ELSS funds have captured the attention of savvy investors.
What are ELSS Mutual Funds?
Definition and Objective: ELSS funds are open-ended equity-oriented mutual funds that primarily invest in stocks. The objective of these funds is to provide long-term capital appreciation by investing in a diversified portfolio of equities across different market capitalizations and sectors.
Lock-in Period: ELSS funds have a three-year statutory lock-in period, the shortest of any tax-saving investment qualified according to Section 80C. During this time, investors are unable to redeem or withdraw their money.
Features and Benefits of ELSS Funds
Potential for Greater Profits: Because ELSS funds are more equity-exposed than typical tax-saving investment choices such as fixed deposits and public provident funds, they may provide higher returns.
Professional Fund Management: ELSS funds are managed by experienced fund managers who aim to identify and invest in companies with growth potential, providing investors with the advantage of professional expertise in stock selection and portfolio management.
Diversification: To lower the risk of investing in individual equities, ELSS funds purchase a variety of stocks from different industries. This diversification helps in spreading the investment risk and minimizing the impact of volatility.
Flexibility: ELSS funds offer flexibility in terms of investment amounts, allowing investors to start with small systematic investment plans (SIPs) or invest lump sums based on their preferences and financial goals.
Tax Benefits of ELSS Mutual Funds
Tax Deduction under Section 80C: Investments in ELSS funds qualify for a tax deduction of up to Rs. 1.5 lakhs in a financial year under Section 80C of the Income Tax Act. This deduction reduces the taxable income of the investor, leading to potential tax savings.
Exempted Long-Term Capital Gains: ELSS funds enjoy tax exemption on long-term capital gains. Any capital gains realized after the completion of the three-year lock-in period are tax-free, making ELSS an attractive option for investors seeking tax-efficient wealth creation.
Loan on ELSS Mutual Funds
Investors often find themselves in need of funds for various reasons while still holding their investments in ELSS mutual funds. In such situations, exploring loan options against ELSS funds can provide a viable solution. Several financial institutions offer loan facilities where investors can pledge their ELSS mutual fund units as collateral and avail of a loan amount based on the number of their investments.
Here are some key points to understand about loans on ELSS mutual funds:
Loan Amount and Terms: The loan amount that can be availed against ELSS funds may vary depending on the financial institution and the amount of the mutual fund units pledged as collateral. Typically, lenders may offer loans ranging from 50% to 70% of the frequency of the ELSS funds. The terms and conditions, including the interest rates and repayment period, will vary between different lenders.
Eligibility Criteria: To qualify for a loan against ELSS mutual funds, investors need to fulfill certain eligibility criteria set by the lending institution. This may include factors such as the amount of ELSS mutual fund units, the investor’s creditworthiness, and the loan-to-value ratio determined by the lender.
Loan Repayment: The repayment of the loan can be structured through regular installments over a specified period. The interest rates charged on such loans may vary based on the lending institution and prevailing market conditions. It is essential to carefully review and understand the terms and conditions, including the repayment schedule and any associated charges or penalties.
Impact on ELSS Investment: It is important to note that when ELSS mutual fund units are pledged as collateral for a loan, they may be temporarily locked or marked as encumbered. This means that during the loan tenure, the investor may not be able to redeem or make any changes to the pledged units. Before choosing to take out a loan against ELSS mutual funds, it is essential to take into account the potential impact on the investment plan and speak with a financial counselor.
Risks and Considerations: While loans against ELSS funds can provide access to immediate funds, it is essential to carefully assess the risks and implications. In case of default on loan repayment, the lender has the right to sell the pledged ELSS units to recover the outstanding amount. This could result in a loss of investment or potential tax implications, as premature withdrawal of ELSS funds may lead to the withdrawal of tax benefits availed earlier.
How to Invest in ELSS Mutual Funds
Assessing Financial Goals and Risk Profile: Determine your investment goals, time horizon, and risk tolerance to choose the right ELSS fund.
Researching and Shortlisting Funds: Conduct thorough research to shortlist funds based on performance, consistency, fund manager track record, expense ratios, and other relevant factors.
Investing through SIP or Lump Sum: Decide whether to invest through a systematic investment plan (SIP) or lump sum. SIP allows for regular investments at fixed intervals, while lump sum investment involves investing a larger amount at once.
Selecting a Reliable Fund House: Choose a reputable fund house with a strong track record in managing ELSS funds and a history of delivering consistent returns.
Online or Offline Mode: Decide whether to invest in ELSS funds online through a digital platform or offline through a registered distributor or the fund house itself.
Completing the KYC Process: Fulfill the Know Your Customer (KYC) requirements by submitting necessary documents such as identity proof, address proof, and PAN card.
Submitting Application and Investment Amount: Fill out the application form, specify the investment amount, and make the payment through the chosen mode of investment.
Monitoring and Reviewing ELSS Investments
Regular Portfolio Review: Observe how the ELSS funds in your investment portfolio are performing. Review the fund’s performance, compare it with the benchmark index, and assess the fund manager’s consistency in delivering returns.
Rebalancing and Exit Strategy: Periodically rebalance your ELSS investments to maintain the desired asset allocation. Evaluate the need to exit a fund if it consistently underperforms or if your investment goals change.
Conclusion
ELSS mutual funds provide investors with an opportunity to grow their wealth while enjoying tax benefits. With a shorter lock-in period, the potential for higher returns, and the advantage of professional fund management, ELSS funds have become a popular choice for tax-efficient wealth creation.
However, investors should carefully consider their risk appetite, and investment goals, and perform thorough research before investing in ELSS funds. By making informed decisions and staying committed to their investment journey, investors can leverage the benefits of ELSS funds and achieve their long-term financial objectives.
Frequently Asked Questions
What is the lock-in period for ELSS mutual funds?
ELSS funds have a mandatory lock-in period of three years. During this time, investors cannot redeem or withdraw their investments. After the completion of the lock-in period, investors have the flexibility to either continue holding the investment or redeem it.
Can I switch or transfer my existing investments to ELSS funds?
Yes, investors have the option to switch or transfer their existing investments from other mutual funds to ELSS funds. However, it’s essential to consider the potential tax implications and exit loads, if any, associated with the existing investments. Consult with a financial advisor or the fund house to understand the process and any applicable charges.
Can I invest in ELSS funds through a systematic investment plan (SIP)?
Yes, ELSS funds offer the option to invest through a systematic investment plan (SIP). SIP allows investors to invest a fixed amount at regular intervals, such as monthly or quarterly. It provides the benefit of rupee cost averaging and discipline in investing.