What is meant by ELSS?
ELSS is the popular name for all Equity Linked Saving Schemes. These plans in this Equity Linked Saving Schemes are close ended. All these saving schemes have a minimum lock in period of three years. These saving schemes are all diversified equity schemes. These equity schemes are offered to public by Mutual Funds, in India. All these Equity Linked Saving Schemes offer benefits of saving tax, under the new section 80C, of Income Tax Act 1961.
What is the Advantage of ELSS?
An Equity Linked Saving Scheme or ELSS is an Equity mutual fund, which is an open ended fund. This Saving Schemes, which is linked with equity, not only helps the investor, in saving income tax, but also provides a tremendous opportunity to the investor to watch her/his money grow, in leaps and bounds, under the given circumstances.
All investments made by the investor in Equity Linked Saving Schemes is legally qualified for getting tax exemptions, under section 80C, of Income Tax Act 1961.
The lock in period of minimum three years in Equity Linked Saving Schemes, is much lower, when it is compared with other available traditional tax saving instruments, such as Public Provident Fund or the PPF, National Savings Certificate or the NSC, or the fixed deposits in banks.
The lock in period for Public Provident Fund is 15 years, the lock in period for National Savings Certificate is 6 years and the bank fixed deposits, which are eligible for tax deductions, are locked in for 5 years.
Since all investments made in Equity Linked Saving Scheme funds are in turn invested in equity market, the long term returns of these equity funds are expected to be lot better than these traditional saving plans and funds.
What are the significant features of Equity Linked Saving Scheme?
An Equity Linked Saving Scheme is a diversified equity mutual fund. This particular fund has a majority of the corpus, invested in equities by Mutual Funds,
The returns from the Equity Linked Saving Schemes is directly related with the returns from equity markets, as the Equity Linked Saving Scheme is also an equity fund.
The minimum lock in period for such investments made in the Equity Linked Saving Schemes, is three years. This period of three years is counted from the date of investment made. If an investor opts for a Systemic Investment Plan, in an Equity Linked Saving Scheme, each of her/his investments will be locked in for a minimum period of three years, starting from the date of investment, made by the investor.
The investor in Equity Linked Saving Scheme has the option to exit from this Equity Linked Saving Scheme after three years, by selling her/his Equities after the maturity period.
The options provided in Equity Linked Saving Schemes
Equity Linked Saving Schemes provides two most useful options to the investors. Equity Linked Saving Schemes provides options for both getting dividend and getting growth in her/his investments. These options are similar to the options offered by other equity funds. The investor is bound to get back a lump sum amount, on the expiry of three years, in the growth option in Equity Linked Saving Schemes.
The other option offered by Equity Linked Saving Schemes is the option of getting dividend on her/his investments. Here, all the investors get a regular dividend income in fixed time period, on her/his investment made in Equity Linked Saving Schemes, when ever dividend is declared by the fund. This payment of dividend is effective even in the three years’ time period of lock in, in the option of getting dividend.
All returns, in which ever mode, from Equity Linked Saving Schemes, are tax free. The investor gets the privilege of claiming up to Rs One Lakh of her/his investments made in Equity Linked Saving Schemes, as a deduction from her/his total income, accounted in that financial year of making investment in ELSS, under section 80C of the Income Tax Act 1961.
The points to pay attention to in an Equity Linked Saving Schemes fund-
The investor who decides to make an investment in an Equity Linked Saving Schemes fund, must exercise extra caution, before making the investment. The investors investing in Equity Linked Saving Schemes, must take pains to do a thorough research in the Equity Linked Saving Schemes funds, at first, before making the investment. The potential investor must pay close attention to the long term performance record of that said fund, that interests the investor. The investor needs to put her/his money in that fund only after she/he becomes fully satisfied with the report of the long term performance of that said fund.
The details of the fund, that interests the investors, should also be thoroughly scrutinised, by the prospective investor. These details include the approach of the fund manager’s investments, the total portfolio of the fund, the expense ratio of the fund, and the track record of the fund as to how volatile the fund had been, in the past.
The significant disadvantages of Equity Linked Saving Scheme
The investment made in an Equity Linked Saving Scheme is not a risk free investment. Equity Linked Saving Scheme is not a risk averse investor. An Equity Linked Saving Scheme investment is exactly like an investment made in the Stock Market. Every risk, that is associated with equity investment, is the risk associated with investment made in an Equity Linked Saving Scheme fund.
Any investor, who is not interested in making any such investment, which is associated with certain risk factors, should avoid investing money in Equity Linked Saving Scheme funds.
The other disadvantage of an Equity Linked Saving Scheme fund is that there is no flexibility in its lock in period. The liquidity of the fund is minimum. If the investor needs her/his money, because of certain emergency situation, the investor can never get her/his invested money before the end of three years of lock in period. Equity Linked Saving Scheme does not allow any pre-mature with drawl of funds.
Equity Linked Saving Scheme has both pluses and minuses. One just needs to be vigilant and careful, while dealing in Equity Linked Saving Scheme funds.