If you are allocating funds to different schemes to acquire wealth for the future, you are investing. While most people invest in conservative schemes, investing in the market is known for resulting in better returns. One of the investment tools that many investors use to allocate funds to the market is mutual funds. But one important aspect you need to remember is that just choosing a mutual fund is not enough. You first need to ascertain your investment objective and target and after doing that you need to select the variant of mutual fund that will help you achieve the target. One of these types is equity-linked savings schemes (ELSS).
What are equity-linked saving schemes?
Primarily, these schemes are known for allocating funds to equities and their related instruments. Equity-linked saving schemes are known for being tax-saving funds, that can help you to beat inflation growth in the long term. These tax-saving schemes are one of the types of equity mutual funds that come with a lock-in period of three years. Tax benefits under these schemes can be enjoyed under Section 80C of The Indian Income Tax Act, 1961. Like any other type of mutual fund, you can invest in ELSS through the SIP mode.
What are the features of these schemes?
- They mostly allocate funds to equities:
In accordance with the name equity-linked savings scheme, these funds are mostly known for investing in equities or even things like equity-linked securities. After investing primarily in equities, a small portion of the fund is allocated to fixed-income securities.
- These schemes have a lock-in period:
Before deciding to sign up for an equity-linked savings scheme, please make sure to be aware of the fact that they come with a lock-in period of three years. During the lock-in period, it is not possible to redeem these funds, even in the case of emergencies. If your funds are invested in ELSS, you need to wait for three years to get them back as there are no provisions in the plan for premature exits.
Why should you consider ELSS for investments?
Here are numerous merits that are associated with ELSS:
- These schemes come with tax deductions:
A notable advantage of equity-linked savings schemes is that they enable their investors to enjoy tax deductions. The said deductions can be enjoyed under the provisions of the Indian Income Tax Act, 1961, i.e., Section 80C. Investors who look for tax-efficient schemes don’t need to look further than equity-linked saving schemes. Hence, through ELSS, you could enjoy a deduction of approximately ₹1,50,000 a year.
- They don’t have a cap on their investments:
Unlike some investment options that may have a limit on their investments, with ELSS, one is free to invest any amount on the scheme and there is no upper capping. However, the minimum amount needed to be invested in ELSS may vary between different asset management companies. Hence, before signing up for the scheme offered by an investment firm, make sure to check the minimum amount of investment for the ELSS offered by the firm.
- They offer revenue that may not be affected by inflation:
Another feature of equity-linked savings schemes is that they are also known for having the potential of offering revenue that may beat inflation. In case the fund manager has invested your money in an ELSS scheme, the income generated through the scheme may not be impacted by the current conditions of the market. An important reason to seriously consider ELSS for a retirement fund is the inflation-beating returns. If you have opted for this scheme, you don’t need to worry about the rising cost of living.