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Mutual Fund | March 19, 2019

Key Features of ELSS

ElSS stands for Equity Linked Savings Scheme. These are tax saving mutual fund that you can use to save income tax of up to 1.5 lakh under section 80C. ELSS have a lock-in period of 3 years and invest the majority of their portfolios into the stock market. ELSS funds are recommended by tax and investment payers as well.

Here are key reasons to invest in these Tax Saving ELSS Funds:

1. Lowest lock-in among tax-saving investments

Tax-saving investments traditionally have long lock-in periods. As per existing rules, among the available tax saver investments in India, ELSS i.e. tax saver mutual funds have the shortest lock-in period of 3 years. This gives you the freedom to update your investments.

2. Inflation-beating returns

ELSS are market-linked diversified equity schemes, this gives them an edge over fixed return investments that offer tax benefits. Fortunately being market-linked, tax saver mutual funds can provide potentially higher returns that can beat the adverse impact of inflation in the long term. This is the key reason why many have moved from old school options to mutual funds and ELSS instead.

3. Investment through SIPs

Using SIPs you don't need to invest one big amount at the end of the financial year to meet your 80C requirement. You can invest a small amount every month and get the same tax benefit at the end of the year. SIPs also have the advantage of rupee cost averaging.

4. Diversify and switch funds

Diversification is an important feature of equity mutual funds. The fund itself builds its portfolio by investing in stocks of different market capitalization and companies from different sectors. You can then diversify across fund houses and investment styles by putting your money in more than one ELSS fund. Furthermore, you can even stop investing in an underperforming fund at any point and start investing in another one.

5. Tax benefit

The tax benefit of ELSS has made it special among the equity mutual funds. Otherwise, the investment objective of ELSS is similar to any other equity mutual fund. You can claim tax deduction under section 80C by investing into the equity Linked saving schemes.

6. High levels of transparency

Mutual fund houses i.e. asset management companies who manage ELSS and other mutual funds schemes are regulated by SEBI. As per SEBI guidelines, AMCs have to make periodic disclosures regarding key information of all schemes managed by them. While some of these have to be reported daily, others need to be reported as per a monthly or quarterly schedule. As of now, no tax saver investment in India features a higher degree of transparency than ELSS.

7. No upper limit of Investment

The tax saving investments comes with some riders. Some of the government saving limit the maximum investment (e.g. PPF). But there is no such restriction with the ELSS. You can invest as much money as you want. However, the tax benefit is limited to the 80C limit. You can start investing in the ELSS Mutual Fund from as low as Rs 500.

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