The bandwidth of ELSS funds

In the last few years, the number of people investing in ELSS funds has witnessed an upward curve. Because of the popularity of ELSS funds, it is better if you are aware of the pros and cons of such type of funds.

The positives of ELSS funds

Tax rebate

Any amount invested in ELSS funds is entitled to rebate of 1, 50,000 as per section 80C of the Income tax act in the present year. This works out to be the only scheme where investors can save on the tax front and earn higher rates of return from equity based funds.

Among the various tax savings investments offers the lowest lock in period

As compared to other tax saving instruments having a 5 year lock period, with ELSS it is only a 3 year period. This stands to be lower when it is a 5 year in case of fixed deposit and for PFF it is 15 year wait. When compared it provides high returns on a waiting period of 3 years.

Power of compounding

A general suggestion would be to invest in ELSS funds with a long term horizon in mind spanning around 5 to 10 years. By default due to a pre -set lock in period ELSS provides an opportunity for saving. In doing so investors are able to cash in on the power of compounding in the long run.

After 3 years redemption is not compulsory

If an investor is happy with returns anticipated from an ELSS fund, they can opt to continue. After 3 years redemption is not compulsory in any way. Though there is minimum investment duration, but no form of maximum investment duration exists.

SIP option

When you are investing in ELSS funds you have an option of SIP. This paves way for an investor to invest a fixed sum of money at periodic intervals of time. It also means that the salaried class of individuals can set aside a sum of money every month in such funds.

Transparent and safe

To invest in mutual funds is a safe and transparent option. All the mutual fund companies fall under the banner of SEBI and necessary disclosures have to be made.

Higher returns

As ELSS funds are equity related schemes higher rates of returns are anticipated. Generally the returns are as high as 20 % when you compare it to other tax saving instruments offering returns to the margin of 7 %. Over the course of 3 years, the returns of equity along with compounding offers attractive investment value for an investor.

But all is not a rosy situation as far as investment in mutual funds evolves. There are some pitfalls as well.  First and foremost tax benefits are allowed to the tune of Rs 1,50, 000 for any given year. This is irrespective of the amount you end up investing in a mutual fund. Any investment made in ELSS funds depends upon financial objective of an investor and how aggressive or conservative they are as an investor.