What are ELSS funds? Why is everyone talking about it?

You have to be living under a rock to not have come across the golden letters in the world of investment- ELSS. ELSS or equity-linked savings scheme, are most investors favourite investment option these days.

But what has led to this enthusiasm for ELSS?

1. Tax efficient

ELSS falls under the Section 80C instruments that can be used to effectively lower one’s taxable income by Rs. 1.5 lakh. By lowering your taxable income, you can significantly lower your tax outgo as well.

2. Wealth creation

As the name suggests, equity-linked savings schemes invest majority of their assets in the equity market. This helps you earn inflation-beating returns and generate wealth over the long term. If you choose the Growth option while investing, then you can also benefit from the power of compounding.

A mutual fund manager who is handling an ELSS will invest in a diversified portfolio with majority of equity and equity related instruments. These high-risk instruments often have the potential to deliver high returns as well.

3. Lowest lock-in period:

Unlike other tax-saving investment options, ELSS schemes enjoy the lowest lock-in period of three years. Tax-saving fixed deposits (FDs) have a lock-in period of 5 years whereas Public Provident Fund (PPF) has 15-year lock-in period.

This, however, doesn’t mean that you have to redeem your investment after three years You can continue to hold on to it for as long as you want and see the magic of compounding unfold right before your eyes.

4. Heed your risk appetite

Though “high risk, high gain” is the definition of the equity market, fact is, not everyone is comfortable taking huge risks. But that shouldn’t drive you away from ELSS. If you want to play it safe, you can select a large-cap ELSS fund which comprises established companies with stellar track records, and thus is unlikely to make losses.

However, if you don’t mind the risk and believe that’s the only way to make handsome gains, then you can opt for some small-cap and mid-cap ELSS funds, which will not only help you save your tax outflow, but it will also create wealth for you over a period of time.

5. Ease of investing

Investing these days has become child’s play because companies help you open ELSS SIPs in just a few simple steps, and you don’t even need a lump sum amount to start investing; in fact, you can start with as low as Rs. 500.

Thus, ELSS has become one of the most sought-after investment option these days.