What are the Advantages and Disadvantages of Investing in ELSS Mutual Funds?

What are the Advantages and Disadvantages of Investing in ELSS Mutual Funds?

An Equity Linked Savings Scheme (or ELSS) is an equity mutual funds scheme that primarily invests equity and equity-linked instrument along with tax benefits as per Section 80C, Income Tax Act, 1961. We will be discussing the pros and cons of investing in ELSS funds.

Explanation of ELSS

An ELSS fund works in the same way as any other mutual fund. The fund manager pools money from investors who have similar investment goals and risk tolerances. An equity fund that invests at a minimum of 80% in equity and equity-related investments across various risk levels. ELSS funds offer tax benefits under Section 80C and have a three-year mandatory lock-in.

The Advantages of ELSS Mutual Funds

  • Save Taxes

Equity-Linked Savings Schemes (ELSS) are the only equity funds to offer tax benefits. Investments in ELSS funds are eligible for tax deduction under Section 1980C of the Income Tax Act 1961. This Section allows you to deduct up to Rs.1.5 million from your taxable income for each financial year for investments in ELSS schemes. It is important to remember that Section 80C provides tax benefits for all investments, including ELSS funds.

  • Potential of Growth

ELSS funds invest in the stock market. These funds offer a good chance of achieving a high return potential if they are managed in accordance with the market cycles.

  • Minimum Lock-in Period

The government offers a number of investments that can be used to receive tax benefits under Section 80C. However, very few of these have a lock-in period. The lock-in period for tax-saving fixed deposits is five years. PPF's lock-in is 15 years. NSC's lock-in time is five years. ELSS funds have a lock-in period that is three years shorter than all other options under Section 80C.

The Disadvantages of ELSS Mutual Funds

  • Market Risques

ELSS funds invest primarily in equity and equity-related instruments. Consequently, ELSS funds are subject to market risks. Investing in ELSS funds is not like other tax-saving instruments such as fixed deposits and PPF. There are no guaranteed returns. The high risk-return ratio and lock-in period help to even out market fluctuations, which is a benefit for long-term investors.

  • The Inability To Withdraw Funds From it.

ELSS funds require a three-year lock-in period. This means that you can't withdraw your investments unless there is an emergency. This can help you to practice financial discipline and long-term investing behavior.

The Conclusions from the Article

  • An ELSS mutual fund is a type that provides tax benefits.
  • ELSS is the most tax-saving Section 80C instrument, with the lowest lock-in period of any and the greatest growth potential.
  • ELSS funds do not offer fixed returns because they invest in stock markets.
  • Investors have two options to invest in ELSS: a SIP or a lump-sum.

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