ELSS: Wears Many Hats!

ELSS – As a Tax saver

ELSS are a type of equity oriented mutual funds that hold at least 80% of their assets in equities and equity related instruments. The equity concentration in the portfolio is as per the stipulated mandate of Securities and Exchange Board of India (SEBI).

These schemes also offer tax benefits under Section 80C of the Income Tax Act, 1961. An amount of up to Rs 1.50 lakhs can be deducted from your taxable income by investing an equal amount in ELSS fund in a financial year. This effectively means you will pay income tax on a lower amount, resulting in tax savings with one of the lowest lock-in period.

But ELSS funds are not just a tax-saving instrument. They are also a good option for long-term investing for your financial goals.

ELSS – As a Long-term Wealth Builder

ELSS, as a diversified equity mutual fund, tends to deliver potential capital gains over the long term while riding through the waves of troubled waters over a period of time. Historically, equities have outperformed other asset classes over the long term. This also means that ideally you should invest in an ELSS scheme for the long-term, and beyond the 3-year lock-in that it offers.

The tax saving attribute of mandatory lock-in is advantageous as it helps you to strictly remain invested for long tenure and can help you benefit from the power of compounding. Compounding is a process of generating returns by reinvestment of returns and principal in subsequent till the end of your investment horizon. In short, exponential growth over time, by reinvesting returns. This reinvestment earns more returns over time, which can make a big difference in your wealth creation journey.

By using the Systematic Investment Plan (SIP) route to continue investing beyond the lock-in term will help in inculcating a regular saving habit, reap the potential benefits of rupee-cost averaging over time and prevent you from timing the markets.

For instance, let us take the 10-year period between June 1, 2013, and May 30, 2023. During this period the BSE Sensex, which is a benchmark for large-cap index, gave a CAGR return of 12.64%.

If you had invested Rs 10,000 every month during this period in a fund with composition like S & P BSE Sensex, you would have invested Rs 12 lakh, which would have grown to Rs 24.14 lakh. And if you increased your investment amount by 5% every year, your total invested amount would be Rs 13.8 lakh, which would have growth to Rs 28.89 lakh.

ELSS – As a Portfolio Balancer

Despite being an equity scheme, ELSS that invests predominantly in equities, the portfolio is diversified across different sectors and companies of the stock market. This diversification can help you balance your exposure to different market conditions and can reduce the impact of fluctuations.

Being actively managed, fund managers adjust the portfolio according to the changing market scenarios with the aim to generate alpha.

• Note: Individuals and HUF can invest in ELSS to avail tax benefits under section 80C of Income Tax Act 1961 and for potential returns over long term

An Investor Education and Awareness Initiative by SBI Mutual Fund.

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