Are you new to mutual fund investments? Are you wondering what ELSS mutual funds are and how they work? If so, you’re in the right place. This beginner’s guide will provide you with all the essential information you need to know about ELSS mutual funds. We’ll explain what they are, how they work, their benefits, and how to invest in them. Whether you’re a first-time investor or looking to diversify your investment portfolio, this guide will help you understand ELSS mutual funds and make informed investment decisions. So let’s get started!

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What Are ELSS Mutual Funds?

ELSS mutual funds are a type of mutual fund that invests primarily in equity shares of companies. ELSS stands for Equity-Linked Savings Scheme. These mutual funds are designed to provide tax benefits to investors under section 80C of the Income Tax Act. ELSS mutual funds have a lock-in period of three years, which means that investors cannot withdraw their money from the scheme before the completion of the lock-in period.

Types of ELSS Mutual Funds

There are two types of ELSS mutual funds: dividend and growth. In the case of a dividend ELSS mutual fund, the investor receives regular dividend payouts. On the other hand, in a growth ELSS mutual fund, the investor receives the entire amount of the investment at the end of the lock-in period.

How do ELSS Mutual Funds Work?

Investment Process

ELSS mutual funds work like other mutual funds, where investors pool their money together and invest in a diversified portfolio of stocks and bonds. However, ELSS mutual funds invest a majority of their assets in equity-linked securities, making them high-risk investments.

Lock-in Period

ELSS mutual funds have a lock-in period of three years, meaning investors cannot withdraw their funds before the end of the lock-in period. This is to encourage long-term investment in equities.

Risk and Returns

Investing in ELSS mutual funds can be risky, but they also offer higher returns than other types of mutual funds over the long term. The returns are dependent on the performance of the underlying securities in the fund’s portfolio. The lock-in period helps investors ride out short-term volatility and capture long-term gains.

Benefits of Investing in ELSS Mutual Funds

Tax Benefits

ELSS mutual funds provide tax benefits to investors under Section 80C of the Income Tax Act, which allows for a tax deduction of up to Rs. 1.5 lakhs per year. This means that the amount invested in ELSS mutual funds is deducted from the taxable income, which can help investors save a significant amount of money on taxes.

Long-term Investment

ELSS mutual funds are designed for long-term investment, which means investors should be willing to hold their investments for at least three years. This approach can help investors build a long-term investment portfolio that can generate wealth over time.

Potential for Higher Returns

ELSS mutual funds have the potential to generate higher returns compared to other tax-saving instruments like fixed deposits and Public Provident Fund (PPF). This is because ELSS mutual funds invest primarily in equity and equity-related instruments, which have historically provided higher returns over the long term.

Diversification of Investment Portfolio

ELSS mutual funds invest in a diversified portfolio of stocks across different sectors and industries, which can help reduce the risk of losses due to market fluctuations. By investing in ELSS mutual funds, investors can diversify their investment portfolio and reduce their overall risk.

How to Invest in ELSS Mutual Funds

Selecting a Fund

Before investing in an ELSS mutual fund, you should research different funds and understand their investment strategy, performance history, and expense ratio.

Investment Amount

You can invest in an ELSS fund with a minimum amount, which may vary from fund to fund. You should select the amount according to your investment goals and financial ability.

SIP vs. Lumpsum

You can invest in ELSS funds either through a Systematic Investment Plan (SIP) or a lump sum investment. SIP allows you to invest small amounts of money regularly, while a lump sum investment requires you to invest a significant amount of money at once.

Choosing the Right Investment Period

You should choose the investment period based on your financial goals, risk appetite, and liquidity requirements. ELSS funds have a mandatory lock-in period of three years, but you can continue to invest in them for a more extended period to earn higher returns.

Drawbacks of Investing in ELSS Mutual Funds

Lock-in Period

ELSS mutual funds have a lock-in period of three years, which means that you cannot withdraw your investment before this time. This may be a disadvantage if you need the money for an emergency or if you want to sell your investment during a market downturn.

Market Volatility

ELSS mutual funds are subject to market risks, and the returns on your investment can be affected by changes in the market. This means that you may not get the expected returns, and there is always the possibility of losing money.

No Guaranteed Returns

ELSS mutual funds are not guaranteed by the government or any other entity. The returns on your investment depend on the performance of the fund and the market conditions. There is always a risk that you may not get the returns that you expected.

Conclusion

In conclusion, ELSS mutual funds are a type of mutual fund that offer tax benefits and the potential for higher returns in the long-term. While there are some drawbacks, such as the lock-in period and market volatility, ELSS mutual funds can be a great addition to an investment portfolio for those who are willing to take on some risk. It is important to carefully consider the investment process, including selecting a fund, investment amount, SIP vs lumpsum, and investment period. By understanding the benefits and drawbacks, investors can make informed decisions about whether ELSS mutual funds are the right choice for them.

FAQs

1. What is the minimum investment required in ELSS mutual funds?

To invest in ELSS mutual funds, you need to start with a minimum amount, which can vary depending on the fund. Some funds may require a minimum investment of Rs. 500, while others may require a minimum investment of Rs. 1,000. It’s important to check the minimum investment amount before investing.

2. What is the maximum limit for claiming tax benefits under ELSS?

Investments made in ELSS mutual funds are eligible for tax deductions under Section 80C of the Income Tax Act up to a maximum limit of Rs. 1.5 lakh per financial year. This means that you can invest up to Rs. 1.5 lakh in ELSS mutual funds in a financial year and claim a tax deduction for the same.

3. Can ELSS be redeemed before the lock-in period ends?

ELSS mutual funds come with a mandatory lock-in period of three years, which means you cannot redeem your investment before the completion of the lock-in period. However, after the lock-in period ends, you can redeem your investment as per your convenience.

4. Can NRIs invest in ELSS mutual funds?

Yes, NRIs or Non-Resident Indians can invest in ELSS mutual funds. They can invest in these funds through their NRE or NRO accounts, subject to the rules and regulations set by the Reserve Bank of India.

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