In this article we cover
1) What are the Advantages of ELSS Funds?
2) What are the Disadvantages of ELSS Funds?
ELSS or Equity Linked Saving Schemes is a category of mutual fundsMutual Funds
Mutual Funds are a type of financial investment vehicle that pool together funds from multiple investors.There are many different types of mutual funds based on the securities that they invest in.
Read More that helps to serve the dual purpose of creating wealth and saving tax. Here we will talk about the advantages and disadvantages of ELSS mutual funds.
You can invest an amount of up to ₹ 1.5 lakhs in ELSS mutual funds and save tax up to ₹ 46,800/- under Section 80C of the IT (Income Tax) Act.
Along with the tax saving benefit, equity investing certainly adds cherry to the cake. Equity linked savings scheme invests in shares of various companies, making an investor a partial & proportionate owner of the company and its business’s profits and losses. Hence, equity has a great potential to earn high returns on investment.
But investors should know everything about ELSS mutual funds before they start investing and lock in their funds for a period of 3 years. Hence, for this purpose, we will guide you about the advantages and disadvantages of ELSS mutual funds so that you can make the right decision whether to invest in ELSS mutual funds or not.
What are the Advantages of ELSS Funds?
Here are some advantages of ELSS mutual funds:
- Gateway to equity: ELSS mutual funds invest up to 80% of its investible corpus in equity. Equity has a great potential to earn high returns on investment since it invests in shares of various companies.
- Shortest lock-in period: ELSS mutual funds have the shortest lock in period of 3 years among other tax saving options like Public Provident Fund (PPF), National Savings Certificate (NSC), etc.
- Convenience: One can invest in one-go with the help of lump sum option or invest in instalments with the SIP option. For investors who are monthly salaried paid employees, SIP can be the best option for them since they may not be able to invest in one-go and can conveniently invest in small amounts monthly.
- Affordability: With the SIP option, investors can invest amounts as little as ₹ 500/- so that it becomes lighter on the wallets.
- Higher returns potential: Since ELSS mutual funds majorly invest in equities, its return capability is superior to that of other tax saving options.
- Diversification: ELSS mutual funds invest in various equity mutual funds to avoid the huge risk exposure concentrated in less number of funds.
- Tax benefit: ELSS mutual funds under the Section 80C of the Income Tax (IT) Act, 1961, saves tax of up to ₹46,800/- by investing ₹1,50,000/-.
- Expert management: ELSS mutual funds are monitored by experts with an immense knowledge of mutual funds. These expert fund managers analyse the markets and alter stocks (whenever required) accordingly to leverage the market trends.
What are the Disadvantages of ELSS Funds?
- High risk ELSS Funds: ELSS mutual funds have a huge exposure to equity markets. Equity related instruments are highly susceptible to market volatility. Hence, due to this ELSS mutual funds carry high risk.
- ELSS Liquidity: ELSS mutual funds come with a lock-in period of 3 years. Investors who invest in ELSS funds should know that they cannot opt out of ELSS mutual funds before the end of the lock-in period.
- Not for risk-averse investors: Since ELSS mutual funds tap into equity markets, this tax saving option should be considered carefully by risk-averse investors as this investment poses high risk on investment.
- Limited benefits: Investors can only avail tax benefit of ₹1,50,000/- even if they invest surplus amount. That is, if an investor invests ₹12,00,000/- he will get tax benefit of ₹1,50,000/- only.
- Management cost: Since ELSS mutual funds are managed by professional fund managers, one has to expect a certain fee that is liable to pay for their expert management.
- Poor management: If the fund manager abuses his authority and churns the portfolio constantly, then it simply increases your expenditure on fees. This can lead you to gain suboptimal returns.
Following are the advantages and disadvantages of ELSS mutual funds, it is highly advisable for investors to consider all the points listed above and take the right decision of investing in ELSS mutual funds.
Open a free mutual fund investment account with India’s best mutual fund distribution platform & get started with your investment in ELSS mutual funds today.
The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent., RankMF | Last Update 30 March 2021