Advantages And Disadvantages Of Investing In Equity-Linked Schemes
Equity-Linked Savings Schemes, or ELSS, are funds that derive their returns from the equity markets. They are also tax-saving instruments that are eligible for tax exemption of up to Rs1.50 lakh under Section 80C of the Income Tax Act.
However, despite being a popular investing instruments, ELSS funds have a mandatory lock-in period of three years, during which, investors cannot withdraw their funds.
To begin their investment journey in ELSS, investors have an option of making a lumpsum payment or starting a Systematic Investment Plan (SIP), i.e. investing a set amount at specific intervals.
Like every other investment avenue, ELSS funds also have their share of advantages and disadvantages.
- A SIP into an ELSS fund has a very low investment threshold of Rs500, and there is no maximum limit of investment
- In the equity markets, the longer the investment, the higher the gains. ELSS funds come with this feature as they have a mandatory lock-in period of three years. Compulsory lock-in period develops a habit of savings
- They have equity exposure as an asset class which gives the power to generate high returns
- The SIP investment option in ELSS gives the benefit of rupee cost averaging.
- It also has the dividend payout option which helps the investor to earn some income during the lock-in period.
- Both individuals and Hindu Undivided Families (HUF) can invest in ELSS funds.
- The investor can start or stop the SIP at any time.
- Earnings after the lock-in period are tax-free provided they are under Rs1 lakh, else the LTCG (long-term capital gains) tax of 10% is applicable. Moreover, LTCG is applicable to positions held over a year and investments held under a year warrant 15% STCG (short-term capital gains) tax.
- Mutual fund houses undertake transparent transactions as they come under the purview of markets regulator SEBI.
- The lock-in period is lower compared to bank fixed deposits (FDs), Public Provident Fund (PPF), National Savings Certificate (NSC), and other investment avenues.
- The market has too many ELSS funds; this confuses investor when selecting a fund to begin their investment journey.
- There is a need for higher documentation at the start of the investment.
- As the funds are exposed to equity markets-related risks, there is no guarantee of returns.
- The investor cannot prematurely withdraw the funds.
- The tax benefits are limited as Section 80C allows only a deduction of Rs1.50 lakh inclusive of all investments. So, if the taxpayer has already exhausted their limit with other investments, then they cannot claim a deduction for the ELSS funds.
- It is not suitable for risk-averse or conservative investors.
ELSS funds are a better choice for individuals looking to save tax and want to earn higher returns from equity exposure. The investor can claim a deduction up to Rs1.50 lakh under 80C, but this includes all investments mentioned in the Section and not just ELSS investments alone. However, the ELSS funds do give a considerable return on investment which makes it more appealing to the investors.
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