Why ELSS is a good option to invest?


Financial portfolio building takes a lot of hard work, effort, sound guidance and help from a financial advisor. Based on what your goals look like and your risk appetite, the portfolio is designed. If your goals are short term such as buying a luxury item, then it would make sense to invest in debt mutual funds such as ultra short term or short-term mutual fund schemes. But, if you have long term financial goals such as retirement planning, building a house, or foreign education of your children, then it is better to invest in equity mutual fundsprovided you have minimum 5 years of investment tenure or even more. In both the cases, the investor’s portfolio would look different from each other.

If one has a goal of growing their wealth, while also saving taxes, then there is a great option available within mutual fund space,known as ELSS or ELSS mutual funds. These are tax saving mutual fundschemes, designed for getting dual benefits – Tax saving as well as wealth creation. Following are the few things, you must know about tax saving mutual funds

  • Least lock-in period – ELSS funds has the lowest lock-in period of 3 years from the date of investment compared to Public Provident Fund or PPF which has a lock-in period of 15 years and tax saving fixed deposits which is locked-in for 5 years. Though the investment in ELSS is locked in for 3 years, one should continue the investments for longer tenure as ELSS funds are equity mutual funds and they can give greater returns over the longer investment tenures.
  • Dividend (IDCW) pay out option – You can even opt for dividend pay-outs (now known as IDCW option) from your investments in ELSSmutual funds which helps you realize some potential gain during the lock-in period of 3 years or even after that provided you are continuing with the investments. However, you must note that dividend payments are made from the scheme NAV and therefore, post the dividend is declared, the scheme NAV falls to the extent of the dividend amount. In short, the dividend payment is adjusted from your investments only. The other point to be noted in case of dividends is that they are added to your income and taxed as per your IT slab.
  • SIP Option– Instead of a onetime investment in ELSS funds, investors can choose to make periodic investments as well, known as SIP. This helps salaried investors allot a part of their income each month for the purpose of investment.

It is understood that ELSSmutual funds are a superior option when it comes to dual benefits in mutual fund investing. Let us understand this with an example- For example, if you had invested Rs 10,000 every month in a fixed income bearing tax saving instrument for 5 years, your Rs 6 Lakhs will become approximately Rs 7.40 Lakhs (assuming 8% return). On the other hand, a monthly SIP of Rs 10,000 in a good performing ELSSmutual fund investment can grow your total investment of Rs 6 Lakhs to approximately Rs 8.48 Lakhs (assuming 13% annualized returns).

The examples above prove that ELSSfundshelp investors to get higher returns, save taxes and continue the process of hassle-free investingwithout taking any direct market risk.