Mutual Fund- FAQs
General
Money Market Mutual Funds(MMMFs)
Equity Linked Savings Schemes(ELSS)
Systematic Investments Plans(SIPs)
Fixed Maturity Plans(FMPs)
Capital Protection-Oriented Funds(CPFs)Gold Exchange Trade Funds(GETs)
Equity linked saving schemes (ELSS)
What are ELSS schemes?
ELSSs are tax-saving schemes offered by mutual funds and are among the only tax-saving instruments that are allowed to invest in equities. These funds may be open or close ended and may offer dividend and growth options. Individuals, hindu undivided families (HUFs) and corporates can subscribe to ELSS schemes.
What is the tax advantage?
Under Section 80 C of the Income Tax Act, 100 per cent tax deduction up to a maximum of Rs.1 lakh per financial year is allowed for ELSS schemes. To claim tax rebate, the minimum lock-in period is three years, and the units can be sold any time after this initial lock in period, though capital gains will be applicable on the sale.
How do ELSS schemes operate?
ELSS schemes operate much like diversified equity funds, except that the investment is locked in for three years. The lock in enables ELSS funds to attract only long-term investors. For the fund manager, this means a stable asset base, and reduced transaction costs.
How are ELSS schemes different from other common tax-saving instruments?
The biggest advantage of ELSS vis-à-vis fixed maturity tax saving instruments like PPFs, NSCs, and bank fixed deposits are the returns. Investing in equities has always been the best asset class for returns in the long term though the risk elements are higher. Other tax-saving instruments also have longer lock-in periods than ELSS schemes, like six years for NSC, and 15 years for PPF.
Should one invest the entire tax saving limit in ELSS?
Despite the high returns in ELSS, the risk appetite of investors needs to be considered before deciding the quantum of ELSS investments. The ‘close-to-optimum’ portfolio model for investors depends on factors such as age profile, expected returns, investment time horizons and risk appetites. For instance, the risk appetite of a 25 year old investor with limited responsibilities is generally higher than that of a 40-year-old working executive who has a family to support, which in turn, is generally higher than that of a 55-year old investor approaching retirement, and for whom preservation of capital is of utmost importance. For the youngest, the equity component is likely to be on the higher side and for the oldest, real estate, fixed deposits and cash components would be proportionately higher.
How does one decide the best ELSS scheme?
Deciding which ELSS to invest in is an important factor. Since ELSS comes with a lock in of three years, investment decisions can not be readily reversed. Therefore, investors should choose their funds with utmost care. Funds with a proven track record, and experienced fund managers are more likely to find investors willing to invest in them.