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  • What are ELSS funds? Here are 4 benefits of investing in ELSS via SIPs?

    Published on December 13, 2019

    Regardless of one’s earnings, it is vital to save and make investments to meet various short-term and long-term financial needs. Mutual fund plans such as Equity Linked Savings Scheme or ELSS aim to help you enjoy the benefit of tax savings and earn high returns.

    In this article, we understand the role ELSS mutual funds play, and the merits of investing in them via Systematic Investment Plans (SIPs).

    ELSS funds

    ELSS funds are tax saving mutual funds; they invest 80% of its assets in equity and equity-related instruments, with a lock-in period of three years. This is considered the lowest lock-in period compared to other Section 80C investment options. For example, tax-saving FDs and Public Provident Fund have a lock-in period of five years and fifteen years, respectively. This gives ELSS mutual fund tax saver an edge over other investment options.

    Besides, when you invest in ELSS, you can claim a deduction under Section 80C up to Rs.1.5 lakh in a financial year.

    Let us look at an example.

    Mr. A earns Rs.12 lakh annually. This means he belongs in the 30% tax bracket. Say, he invests Rs.1.5 lakh in ELSS funds. After claiming the deduction under Section 80C his taxable income becomes Rs.10.5 lakh.

    This results in tax savings of Rs.46,800 (1.5 lakh x 31.2%). Long-term capital gains (LTCG) up to Rs.1 lakh from ELSS funds are exempt from tax. If the capital gains are above Rs.1 lakh, 10% tax is applicable.

    Pros of investing in ELSS funds via SIPs

    Following are the top benefits you can enjoy by setting up a SIP to invest in an ELSS scheme.

    1. Rupee cost averaging

    When you invest via SIPs, you enter the market at different market phases. So, when the markets are low, you get to purchase more units and vice versa. This can help to average your purchase cost in the long run and fetch you better yields.

    1. Financial discipline

    Equity funds can be tricky for risk-averse investors as the funds carry a higher risk commensurate with the high returns it offers. Some investors withdraw their funds before a scheme matures when markets hit a low. They end up losing more money in the process. With SIPs, you can continue to invest regularly and spread the risk by investing at different levels.

    1. Small investment

    SIPs start as low as Rs.500. You can start small and gradually increase your SIP amount to match your financial goals.

    1. Ease of investments

    With an auto-debit facility, the SIP amount is directly deducted from your account to be invested in ELSS. Besides, investing in ELSS does not require opening a demat account, unlike other exchange-traded funds.

    Conclusion

    To summarise, ELSS tax saver mutual funds offer an excellent combination of a shorter lock-in period, greater flexibility and market-linked returns. This makes it one of the most favoured tax saving investment options.

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