Advantages and benefits of ELSS investments: Know it all

Investing in your future is key to building wealth and gaining financial security, something that every person strives to achieve. But if your investments can also provide tax deductions, then the benefits are even greater. ELSS, or equity linked savings scheme, is an equity mutual fund that gives you such an opportunity. Diversifying your portfolio with ELSS funds can be a smart way to grow your investments and take advantage of tax deductions under Section 80C of the Income Tax Act at the same time.  

Let’s break down the advantages associated with ELSS funds and examine how these tax saving mutual funds can be a crucial tool for creating sustainable wealth over time.

• Low lock-in period

These tax saving mutual funds have a three-year lock-in period, making them one of the shortest lock-in periods among all 80C investment options, such as public provident fund (PPF) or national savings certificate (NSC), which have more extended lock-in periods.

It is noteworthy to mention that even after the lock-in period ends, you can still continue your ELSS investment to avail the compound returns over time. 

• Risk mitigation with portfolio diversification

As ELSS funds mostly invest in equities across market capitalisation such as large-, mid-, and small-cap stocks, you can create a portfolio that provides exposure to various industries and sectors. This offers an edge over investing directly into a single stock and helps reduce market risk or any fluctuations that may result from investing in individual stocks. Therefore, if a particular stock does not perform as expected, others in the portfolio could mitigate the risk and help maintain an optimum return on investment.

• Potential for long-term wealth creation

The returns generated by an ELSS mutual fund depend largely on how well its underlying stocks perform in the market, and since it invests predominantly in equities, there is potential for long-term wealth creation through capital appreciation over time. It also gives exposure to high-growth stocks that may not be available through other tax-saving instruments such as PPF or NSC. The combination of tax savings and wealth-building opportunities makes ELSS highly recommended by most financial experts.

• Investment flexibility

You can invest in ELSS funds through systematic investment plans (SIP) or via a lump sum as per your risk appetite and return expectations. SIP investments allow you to spread out your risk by investing over time, while lump sum investments give you an opportunity to make large investments at once, allowing you to benefit from market fluctuations immediately. 

Most experts further recommend SIP for ELSS schemes, as it allows you to invest regularly in small amounts over time, allowing you to benefit from rupee cost averaging when markets are volatile. It also helps spread out your risks by diversifying your portfolio across different sectors and companies with every instalment you make. If you opt for SIPs, make sure to use an SIP calculator to calculate how much you need to invest each month so that you can reach your financial goals within the desired timeframe.

Closing thoughts

With a combination of tax benefits, diversification, professional management, potential growth with equity exposure, and affordability through SIPs, ELSS funds can be an integral part of any investor’s portfolio. Furthermore, they are highly accessible through online platforms and mutual fund investment apps, making it easy to compare plans, buy or sell quickly and start building a portfolio. 

However, before investing, it remains important to consider the type and size of the fund, its objectives, expense ratio, asset composition, risk level, and other factors relevant to investment strategy.