When Investors search for investment opportunities that give good returns with tax-saving benefits then the name of an equity-linked saving scheme emerges. ELSS is a mutual fund that invests in the stock market or equity. In this article, we will discuss all the aspects which you need to know about ELSS Mutual Fund.
What is ELSS Fund
ELSS is an equity-oriented mutual fund that comes with a minimum lock-in period of 3 years and the assessee can claim a maximum deduction of up to Rs 1,50,000 in section 80C by investing in it.
How ELSS Fund Works
ELSS Funds is a mutual fund that invests mainly in the stocks of the listed Company in a certain proportion according to the predetermined objective of the fund. The fund managers choose the stocks of various companies with varied market capitalisation and industry sectors. The fund managers choose the stock by conducting in-depth research of stocks in which the fund is going to invest.
Benefits of Investing in ELSS Mutual Fund
Potentially higher returns: Unlike ELSS where the return is market-linked, other 80C investments like PPF or FDs are fixed income products. ELSS has the potential to generate significantly higher wealth in a medium to long-term investment horizon.
Promote Long term Savings; ELSS Fund Comes with a minimum lock-in period of 3 years and one can be extended to any number of years which promotes long term savings.
Tax benefits: ELSS is known for these tax-saving benefits by investing in it investors can claim deductions up to Rs 1,50,000 under section 80C of the Income-tax Act.
Diversified Portfolio: By investing in ELSS fund one can enjoy benefits of the diversified portfolio as fund houses invest in different companies with a different market capitalization and the different Sectors
Hassle-free Investing: Investing in an ELSS fund is hassle-free and convenient. One can easily start investing through monthly SIPs or lumpsum Investments.
Factors to be Consider before Investing in ELSS Fund
History of fund: It is recommended to choose fund houses that have performed invariably over a long period, say about five to 10 years.
Compare fund Returns: Before investing in a particular fund, compare the fund performance with its competitors and if it performs compatible performance in the past. If a fund outshines its benchmark or competitors, then the fund delivers high returns
Expense ratio: The expense ratio represents how much of a percentage is charged for managing the fund. If a fund has a lower expense ratio, it means you can have higher returns – so it’s always better to go for such funds.
Financial Ratios of Fund: Analysis of Financial Ratios of Fund helps you to assist the performance of a fund. You can also consider several parameters such as Standard Deviation, Sharpe Ratio, Alpha and Beta to analyse the performance of a fund. A fund with a higher standard deviation and beta is riskier than one with a lower deviation and beta. Choose funds with a higher Sharpe ratio.
Capabilities of a fund manager: Before Investing in an ELSS Mutual fund you must rely on the capabilities of the fund manager
because he/she is the person who plays a crucial role in the management of your funds. The fund manager must be skilled and must have great experience in picking the right stocks and creating a strong portfolio.
Tax Implication on ELSS Mutual Fund
Any Profit or Gain arising from the sale of the ELSS fund is taxed under the head “Capital Gain” As the minimum lock-in period of ELSS Mutual fund is 3 years and after 3 years when investors sell ELSS mutual fund then it will be taxed as long term capital gain under section 112 of the Income-tax tax Act at the rate of 10%(plus cess) if long term capital gain exceeds Rs 1,00,000
Investors of ELSS Fund can also claim a deduction of the invested amount up to Rs 1,50,000 under section 80C of the Income-tax Act
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