Pros and Cons of Investing in ELSS Funds

Believe it or not, ELSS or Equity Linked Saving Schemes are the only investment instruments that provide inflation-beating returns and handsome tax savings, all compounded into one. Attractive as this may seem, there are both advantages and flip sides associated with ELSS investing. We take a look at both sides of the coin.

Advantages of ELSS Funds Investing 

Saves Tax

ELSS funds are mutual funds eligible for tax deductions under section 80C of the Income Tax Act. The deductions could be up to 1.5 lakh a year! Even though the new tax laws make long-term gains above 1 lakh taxable, ELSS mutual funds remain the most preferred tax-saving option for those seeking high returns. The returns are significantly higher when compared to other tax-saving instruments like Public Provident Fund (PPF) or Unit Linked Insurance Plans (ULIPs). 

Short Period of Lock-In

Upon investing in ELSS mutual funds, the money remains locked in for 3 years. This is shorter compared to other tax saving instruments like the Employees Provident Fund, Public Provident Fund, or National Savings Certificates, all of which have lock-in periods of 5 years. 

Long-Term Returns are on Offer

If you are seeking to build a corpus over several years of investing, these funds could be your preferred choice provided you do not withdraw money after the lock-in period has elapsed and choose to remain invested for longer. Since these funds are equity-driven, substantial wealth accumulation is possible in the long term with due patience! 

Inculcates Discipline in Investing

Investing in ELSS funds can begin with a sum as small as Rs 500 per month! You can invest through a Systematic Investment Plan (SIP) with monthly installments and watch your wealth accumulate over years.

Returns are Higher

ELSS schemes invest their funds in equities and mop up higher returns from the market. The returns are practically double or even more compared to regular saving schemes. As per stats, these investments yield close to 12% returns over 10 years. Schemes like PPF for instance, offer only 8%. 

ELSS Funds Investments: Some Considerations 

Tax Rebates are Limited

With these funds, tax rebates remain limited to 1.5 lakh per year! So, even if you invest as much as 10 lakh a year, your rebate remains locked at 1.5 lakh only! This could be a limitation. It is also important to remember that under section 80C, this amount of 1.5 lakh is the limit for the total tax rebate for the financial year! So, if you have rebates owing to home loan installments you are paying or PPF contributions you are making; those will also be included in 1.5 lakh! Practically speaking, if you already have rebates amounting to 1.5 lakh through other investment instruments, investing in ELSS funds will not add anything extra to it. 

Mutual Funds are Exposed to Market Risks

Contributions made to ELSS mutual funds are exposed to market risks. There are no guaranteed returns. 

Ideally, these tax-saving funds are best suited for beginners who are taking baby steps in the money markets and planning to build a fortune over time.