Explained: What is ELSS Mutual Fund?

Are You an Investor looking for a dual benefit of Tax Saving and wealth creation?

As an investor in Mutual Fund, we always have multiple choices regarding our investment decision.

So, as investors, we have to take the right choice that caters to our financial goals.

If you are looking for wealth creation & tax saving investment options, then investing in ELSS Mutual Fund helps you achieve that financial goal. Let’s see how?

Table of Contents:

1. What is an ELSS Mutual Fund?
2. Advantages of ELSS Mutual Fund
3. Factors to Consider Before Investing in ELSS Mutual Fund
4. Tax Benefit in ELSS Mutual Fund
5. Tax Liability of ELSS Mutual Fund
6. How to Invest in ELSS Mutual Funds
7. ULIP Vs ELSS: Understanding the Difference

1. What is an ELSS Mutual Fund?

ELSS Mutual Fund is one such special category of Mutual Fund that allows the dual benefit of Tax Saving and Wealth Creation.

ELSS Mutual Fund full form -:  Equity Linked Saving Scheme

In this saving scheme, 65% of the asset gets invested in Equity & Equity related investment schemes.

It provides an investor with the opportunity to invest across various Market Cap & Industrial sectors.

It has the potential to generate an inflation-beating return in the long run. And in comparison to other 80C options like PPF and ULIP, it has the shortest lock-in period of 3 years.

2. Advantages of ELSS Mutual Fund?

There is no single mutual fund that can cater to the financial needs of different people.

Now let’s see the features of the ELSS mutual Fund and check whether it suits our investment portfolio.

Features of ELSS Mutual Fund:

• Investors will get benefitted from investing across the market cycles.
• It has the potential to generate an inflation-beating return in the long run.
• It provides investors with the dual benefit of Wealth Creation & Tax Saving at the same time.
• The Lock-in period ensures that you stay invested for at least 3 years.
• In comparison to other saving schemes like PPF & ULIP, it is more beneficial to investors. 
• It gives you the flavour of equity in your investment portfolio.

3. Factors to consider before investing in ELSS Mutual Fund?

After reading about the advantages of the ELSS mutual Fund, we will be more inclined to choose this particular fund.

But here are a few factors that we should consider before opting to invest in ELSS Mutual Fund.

• It is suitable for an investor with long-term Financial Goals.
• Only investments less than or equal to 1.5 lakhs will be provided with tax benefits.
• You should be aware of the lock-in period of 3 years.

4. What is the tax benefit in ELSS mutual fund?

ELSS mutual funds offer tax benefits under Section 80C of the Income Tax Act. Investors can claim a deduction of up to Rs. 1.5 lakh annually on investments made in ELSS funds. This deduction reduces the investor’s taxable income, leading to lower tax liability. Additionally, ELSS funds have a lock-in period of three years, which is the shortest among tax-saving investment options under Section 80C.

5. What is the tax liability of ELSS Mutual Fund?

If your ELSS Mutual Fund is sold within a year, it is known as Short-Term Capital Gain. And this Short-Term Capital Gain will be taxed 15% on the gain.

Otherwise, your ELSS Mutual Fund becomes a Long-Term Capital Gain, and anything below 1 lakh is exempted from tax.

A Long-Term Capital Gain of over 1 lakh will attract a 10% of tax.

The video below will help you understand in depth about this category of Mutual Funds.

What are ELSS Funds? – Watch here!

6. How to invest in ELSS mutual funds?

To invest in ELSS mutual funds, follow these steps:

• Choose a reputable mutual fund company.
• Complete KYC formalities.
• Select ELSS funds based on your goals.
• Open an investment account.
• Invest via lump sum or SIP.
• Monitor investments regularly.
• Consider tax benefits under Section 80C.
• Stay informed about market trends.
• Rebalance portfolio as needed.
• Seek advice from a financial advisor if necessary.

7. ULIP Vs ELSS

What is the difference between ULIP and ELSS?
ULIP (Unit Linked Insurance Plan) and ELSS (Equity Linked Savings Scheme) are both investment options but with different characteristics and purposes.

ULIP:

• ULIP is a type of insurance product that offers both investment and insurance components.
• It provides life insurance coverage along with investment options in equity, debt, or a combination of both.
• Premiums paid towards ULIP are divided between insurance coverage and investment, with a portion allocated towards various funds as chosen by the policyholder.
• ULIP offers flexibility in terms of switching between funds and altering investment allocations.
• Returns from ULIP are subject to market performance and can vary based on the chosen funds’ performance.
• ULIPs have a lock-in period of five years.
• However, ULIPs typically have higher charges, which can impact returns negatively.
• The return potential of ULIPs may be lower compared to other investment options due to the charges involved.
• Combining insurance and investment in ULIPs may not always be advantageous as it may result in inadequate coverage or suboptimal investment choices.

ELSS:

• ELSS is a type of mutual fund that primarily invests in equity and equity-related instruments.
• It is specifically designed for tax-saving purposes under Section 80C of the Income Tax Act in India.
• ELSS funds have a minimum lock-in period of three years, which is shorter compared to other tax-saving options.
• ELSS offers the potential for higher returns compared to traditional tax-saving instruments like PPF or NSC, as it invests predominantly in equity markets.
• ELSS funds do not offer any insurance coverage and are solely focused on wealth creation through equity investments.
• Returns from ELSS are dependent on the performance of the equity markets and the fund manager’s strategy.
• In summary, while ULIP combines insurance coverage with investment options and offers flexibility in fund allocation, ELSS is purely an equity-focused mutual fund designed for tax-saving purposes with a shorter lock-in period and potential for higher returns. However, investors should be mindful of the higher charges associated with ULIPs and carefully evaluate the suitability of combining insurance and investment within the same product.

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