We also know that the stock market is a stormy place for both beginners and experienced investors alike. Analysing and picking stocks is not everyone’s cup of tea and having a fund manager manage your portfolio can be expensive on an individual level. Hence, there are instruments available like the Mutual funds and ELSS that help to diversify your portfolio and minimise your risk.
What is an ELSS ?
An Equity Linked Savings Scheme(ELSS) is a mutual fund scheme that invests primarily in equity or equity related instruments. An ELSS helps in tax saving while also providing higher returns. ELSS invests in the shares of the listed companies on NSE and BSE. ELSS funds are built in specific proportions as per the investing objective of the fund. These funds can be built on the basis of Market capitalisation(Large, Mid, Small cap) and across industry sectors (IT, Auto, Pharma) with the common objective to maximise capital over the long run.
ELSS offers multiple benefits in comparison to other available tax saving instruments available in the market:
One feature that makes ELSS popular is that it offers tax benefits under section 80C to the retail investors. One can claim a deduction of upto Rs.150000 when they invest in ELSS. The returns on ELSS are not tax exempt anymore as per budget 2018. A 10% LTCG is levied if the gains exceed Rs.1 Lakh per year.
Lock In Period
ELSS has the lowest lock in period of only 3 years. Among other tax saving instruments like the PPF(15 years) and the EPF (matures at 58 years of age), ELSS is comparatively flexible. For anyone doing an SIP in ELSS funds has to lock in their last SIP for 3 years.
Investing in an ELSS gives you access to a pool of funds that follow a specific strategy and an investor can easily expose themselves to that category of equity. Investing in mid cap and small cap stocks comes with risks. Hence with seasoned managers who manage the ELSS funds one can diversify and reduce the overall risk of the portfolio.
When we invest in Mutual funds, its NAV is heavily dependent on redemptions by other investors of the same fund. Here in ELSS funds, units are locked in for 3 years hence Fund managers can plan their investments better leading to lower fluctuations in returns in comparison to equity funds. Hence they are less riskier than mutual funds and yet tend to provide returns in the similar range.
How does PensionBox help you?
PensionBox helps you to plan your dream retirement. Through our app, you can easily track your retirement savings which may be ELSS or not and figure out how much you need to save to reach your dream retirement goal.