ELSS - Equity Linked Saving Scheme

ELSS or the Equity Linked Saving Scheme is an exclusive mutual fund scheme that mainly invests in equities and stock market. This scheme is particularly popular among investors owing to the tax benefits as covered under Section 80C of the Income Tax Act.. The investors prefer this scheme to other investment options owing to the optimum liquidity this scheme provides owing to its short lock-in period.

The ELSS employs an aggressive investment approach to maximise profits for the investors who wish to invest in schemes that yield higher returns. The investors can invest in the scheme by either employing SIP (Systematic Investment Plan) or by opting for lump sum investments.However, if the investor is funding the scheme through the SIP option, the maturity date of each installment would differ.

The ELSS schemes are subject to market risks as the money invested is volatile to fluctuations in the stock markets, since this is a market linked savings scheme.

Features of Equity Linked Saving Scheme (ELSS)

Given below are some of the features of an Equity Linked Saving Scheme:

Equity Oriented Investment

A major chunk of the fund is allocated towards securities who orientate their positions on equities. However, most ELSS schemes also have a fair bit of exposure towards fixed income securities also.This enables the investor to get higher returns as compared to other investment options.

No Provision for an Early Exit 

The scheme offers ideal liquidity for investments i.e. three years. However, there are no provisions set in case the investor wants to exit the fund prematurely. After the maturity period the investor has the option to reinvest or depart from the scheme by trading their securities.

Maturity Period 

The maturity period for the scheme is three years which makes it the shortest among other long-term investing schemes. This is ideal for investors looking for significant returns in a shorter period of time. However, since these are a market linked scheme, the possibility of guaranteed returns is bleak in comparison to other investment options.

Investment Cap 

There is no maximum cap on the investments made to the ELSS scheme. It also offers headroom to the investors who are inclined to invest a smaller amount with minimum requirement going as low as Rs 500. The minimum investment amount tends to differ according to the fund house, so the investor can plan their investments according to their financial situation.

Tax Deductions 

The Equity Linked Saving Scheme is one of the most widely used tax-saving investment options.The ELSS offers annual tax return of upto Rs 150,000 in accordance with the Section 80C of the Income Tax Act. The profits from the investment made after the lock-in period are exempted upto a limit of Rs 1,00,000.Any gains made over the exemption limit will be taxed at a rate of 10%.

High-Yielding 

The ELSS offers an avenue to the investors who want to invest in dynamic and aggressive securities which tilt towards maximizing tax-free returns on the amount invested. The scheme provides an opportunity for investors to expand their savings which would be attuned to the high-inflation rates. As these investments mainly invest in equity options, a substantial amount of returns can be generated throughout the investment period.

Market Risks 

The fund predominantly invests in equity oriented securities which makes it prone to volatility in the market. Since the returns on investment that you get from this scheme is mainly linked to the stock market, it does not guarantee fixed returns. The returns that you get from this scheme will depend on the ups and downs on the market. 

Benefits of ELSS

Given below are some of the benefits of investing in an Equity Linked Savings Scheme option:

Rate of Returns 

The ELSS is a popular choice among the medium to long term investors as it is directly linked to the stock market. The other fixed income avenues such as PPF and FDs lose out on the significant profits the market offers to the investors. The interest accrued from these fixed income securities is fixed whereas the ELSS scheme strives for maximum returns on the money invested. The potential to churn profits from the investments is boundless if the investor chooses to invest in an efficient mutual fund. 

Lock-In Period 

The lock-in period for this investment is just three years which makes it the shortest when compared to other fixed deposit counterparts. Funds like PPF and FDs have decided on the maturity period of 15and 5years respectively. Therefore, ELSS offers the highest returns with the lowest investment lock-in period.

Tax-returns on Profits 

The scheme offers attractive tax advantages on the profits which are made by the investor after the maturity period. The investor is eligible to take home their proceeds with little tax levied as the scheme is covered under the Schedule 80C of the Income Tax Act The taxpayer can claim exemptions upto Rs 1,50,000 in an investment year. Thus, an Equity Linked Saving Scheme automatically entails lower tax expenses for the investor.

Consistent and Convenient Investing 

An investor can opt to invest in the scheme through SIPs where they can simply invest the money on a monthly basis in a hassle-free manner. Through a Systematic Investment Plan, the investor is in charge of the investment amount for each period. The investment amount can be increased or decreased according to the market and financial conditions of the investor. This also inculcates a sense of systematic saving as the investor will have to plan their finances around their investment payments.

Tax Benefits Under ELSS Scheme

The investments made to the ELSS fund are eligible for tax benefits under the Section 80C of the Income Tax Act. In accordance with the Act,, amounts upto Rs 1,50,000 are eligible for tax deductions. The investor can save upto 46,800 annually due to these exemptions.

Why Should You Invest in ELSS?

Given below are some of the benefits of investing in an Equity Linked Savings Scheme product:

Long-Term Gains

The ELSS offers a lucrative deal to its investors as the mutual fund maintains a portfolio that spreads across all the sectors to optimize profits for its investors. The fund gives an opportunity to its investors to make long-term gains from the equity market. The diversified portfolio ensures attractive returns to its investors who are seeking to make the most out of their investments, while also ensuring relative investment safety. 

Small-sum Investing 

It provides a viable option for investors who are averse to risk-taking and are inclined to invest small amounts on a consistent basis. Like any other mutual fund an individual can opt for monthly SIPs which also offers an option of SIP top-up where the investor can increase their investment in the scheme by increasing their monthly SIP amount. By going for the SIP option, you can continue investing consistently and according to changing market conditions.

Attractive Returns 

Since this scheme is directly linked to the stock market, there is always a possibility of significant return on investment. The ELSS funds generate double the returns on their investments. According to figures, on an average the ELSS generates close to 12% profits over a ten year period as the funds are invested in equities that sponge higher returns from the market. This is much higher as compared to other savings scheme options available.

Factors to Consider Before Investing in ELSS

The investor who is inclined to invest in the ELSS scheme should account the following factors before they commence with their investment: 

Purview of the Investment

The investor should meticulously determine the horizon of their investment. The interested individual should be willing to invest long-term to get the most out of their profits to diminish market volatility as the money would be ultimately invested in the equity market. 

Manage Expectations from Returns 

The money invested does not offered guaranteed returns unlike other fixed investments. It is subject to market fluctuations so the investor shall be ready to hold their compose incase the market is volatile. The investor should have a long-term association in mind with the fund to yield maximum returns. 

Risk Level

Since ELSS funds mainly invest in equity options, the risks involved are somewhat similar to that of investing in the stock market. However, this does not mean that ELSS are always high risk fund schemes, there are different types of fund levels to cater to the needs of different types of investors. It is important to note that while investing, high risks are often linked to high returns. Be sure to choose your investment according to your financial goals and plans

Invest Through SIP

A systematic investment plan is one of the ways to consistently invest small amounts into mutual funds. This allows the investor to take advantage of the rupee-cost averaging and bring down the average price the mutual fund units are purchased at. While SIPs are considered the best way to start investing, they are particularly useful when the markets are failing. In this method, you invest a fixed amount at regular intervals and by units at the prevailing NAV. This eliminates the risk of a lump sum investment when the market is at a high.

How Does ELSS Work?

The ELSS functions through the ELSS fund. The fund invests the majority of their corpus in the equity-oriented securities. The rest of the amount invested in various money market securities. The capital appreciation ensures optimum returns to the investors. The amount invested in ELSS is subject to the performance of the equities it has invested in. The ELSS fund maintains a diversified portfolio ranging across all sectors in companies with small, mid or large market capitalizations.

In simple words, if the market value of the stocks in which the ELSS funds has invested increases, the investors also get a positive return. Alternatively, if the asset value falls, the investors experience a loss on their investment.

SIP vs Lump Sum

The investor can invest in the ELSS scheme either through monthly or quarterly SIPs, or with lump-sum payments. The investor should take into consideration the following factors before selecting the mode of investment. 

Investment Strategy 

The investment strategy is one of the major factors to be considered while deciding an investment method. If the investor is inclined to invest consistently where they want to allot a small percentage of savings then they naturally gravitate towards the SIPs. Whereas, if the investor possesses a risk-appetite and wishes to yield major returns then they should consider the lump sum payments option.

Usually, salaried employees prefer the SIPs as it provides them freedom to budget their investments with respect to their incomes. The lump sum payments are preferred by individuals who are seeking to invest a substantial amount to the fund. The investor can also reap many tax benefits if they choose to invest at the beginning of the financial year. 

Sensitivity to the Market 

The investors’ money is prone to fluctuations in the market as the ELSS fund majorly invests in equities. But it has been noted that the SIPs perform better when the market is adverse as the consistent long-term investing model succeeds in diminishing the hostility of market fluctuations. SIPs give the advantage to the investor to invest in funds across various business cycles benefitting from the ups and downs of the share market.

The lump sum payment strategy misses out on investing in funds across the business cycle. But they are fruitful for investors who have an intricate investment horizon and sensibilities and know how to capitalize on the ongoing bearish or bullish trend. Substantial ROI can be generated from the lump sum investments if the investor employs a sound investing strategy.

Lock-in Period 

The lock in period for the in the ELSS scheme is three years. But the maturity date of the amount invested is subject to the investment option an investor selects. In the case of lump sum payments the investments are open to sale or reinvestment at one go. The maturity date would be exactly after three year from the date they made their lump sum payment. Incase of SIPs they mature with respect to the order in which the installations were made. After three years, the amount invested is unlocked in the sequence in which the investments were made.

Nature of the Investor 

SIPs are popular among first-time investors since It provides an ideal platform for the investors to incorporate significant investing habits and gain exposure to nuances of the equity market from a long-term perspective. Due to minimum risk involved, the investor can absorb and employ strategies which orient them towards better investment planning and returns.

On the other hand, the lump sum payment is ideal for investors whose source of income is seasonal. The lump sum payment option is predominantly availed by the self-employed investors as they may find it inconvenient to keep up with the periodic payments.  

Best Performing ELSS funds

Given below are some of the top performing Equity Linked Savings Scheme available in the country:

Name of the Fund	Average Returns
Mirae Asset Tax Saver Fund	CAGR of 17.9% till date
Quant Tax Plan	CAGR of 14.8 % till date
Canara Rebeco Equity Tax Saver Fund	CAGR of 19.3 % till date
Kotak Tax Saver Fund	CAGR of 12.2% till date
Baroda BPN Paribas ELSS Fund	CAGR of 10.8% till date
UTI Long-Term Equity Fund	CAGR of 14.3% till date
DSP Tax Saver Fund	CAGR of 14% till date
BOI AXA Tax Advantage Fund (G)	CAGR of 17.8% till date
ICICI Prudential Long-term Equity fund Tax Saving (G)	CAGR of 19.2% till date

Advantages and Disadvantages of ELSS

The ELSS has experienced a surge of investors who are keen on investing in the scheme. Find below the diverse set advantages and disadvantages that an investor should be aware of before they decide to invest in the ELSS.

ADVANTAGES OF ELSS
Tax Deductions	The ELSS is an exclusive scheme that allows the investors to earn profit upto Rs 150,000 which is tax deductible under the Section 80C  of the Income Tax Act. The scheme has become extremely popular  as it provides attractive profits from the equity market which are exempted from taxes.
Shortest Lock-in Period	The lock in period for ELSS is just three years which is shorter than its other long-term investing counterparts like the PPF and FDs. This provides an option to investors who’re interested in mid to long-term investments.
Minimal Taxation on Capital Gains	The profit from the sale of the ETSS is accounted as long-term capital gains. It benefits the investor as 15% tax is levied on short-term capital gains. The investor would be able to take all the proceeds if the profit accumulated is upto Rs 1,50,000
Long-Term Investing	The investors are not obligated to exit the scheme after the maturity period. If they are satisfied with the returns they can choose to continue with the scheme. They can even top-up their investments if they’re investing through SIPs. This long-term model benefits investors who want to avail compounded returns on their investments.
Transparency	The mutual fund adhere to the guidelines set up by SEBI who are required to maintain and disclose the same to the regulating body. This ensures transperancy and security among the investors about their investments being prospered in a legal and safe environment.

DISADVANTAGES OF ELSS
CAP on Tax Benefits	The ELSS Fund does not grant any specific tax benefits to investors who invests a considerable amount to the fund. The Tax benefits on the investments are upto Rs 1,50,000 which might not compliment the investor who have invested in the scheme to reap major capital gains.
No Provision for Withdrawal	Although the ELSS scheme boasts the shortest maturity period among its competitors. There is no provision for an investor who wishes to exit before the maturity period. This can limit the dissuaded investors who may require the accumulated amount for emergencies.