Instructions for Investing in Top-Performing ELSS Funds: A Comprehensive Overview
Investors seeking tax-saving opportunities and potential returns from the stock market may find Equity Linked Savings Scheme (ELSS) funds an attractive option. However, it is essential to understand the unique features of these funds, particularly the lock-in period for each SIP installment.
**The Lock-in Period Explained**
Each SIP installment in an ELSS fund has an independent 3-year lock-in period. This means that every SIP installment has its own separate 3-year lock-in, starting from the date the particular installment is made. You cannot redeem the amount invested in any SIP installment before 3 years from that installment date. After completion of 3 years from a specific installment, you can redeem the units bought with that installment.
This setup restricts premature withdrawal of ELSS SIP investments but also provides the advantage of systematic investing combined with tax benefits. You cannot liquidate your entire ELSS SIP investment before 3 years; partial redemption becomes possible only once each installment completes its 3-year lock-in.
**Key Implications**
The structured lock-in enforces a disciplined, long-term investment horizon for tax-saving and wealth creation. The ELSS scheme is an open-ended fund, so you can continue to invest beyond the lock-in, but redemption for each part only after its lock-in. Tax benefits under Section 80C are available for the invested amount, but only if the invested amount remains locked for 3 years.
**ELSS Funds and Performance**
ELSS funds may have different investment strategies in terms of the proportion of equity and debt they hold and the level of diversification they provide. Over a long period, ELSS funds have been handsomely beating the indices. However, it is important to note that ELSS is a pure-play equity product, and it follows a volatile path to progress.
In recent years, some ELSS funds are outperforming the indices by a good margin, while others are struggling to catch up. Investing in ELSS funds should be done from a long-term perspective, with a better point of reference being the 10-year and 20-year performance, which has also been good for the ELSS category.
**Accessibility and Tax Benefits**
Investing in ELSS funds is easy through the ETMONEY app. ELSS investments are eligible for tax benefits under Section 80C of the Income Tax Act, with a maximum of Rs. 1.5 lakh eligible for a tax deduction. Additionally, taking a loan against an ELSS fund is an option available to investors, with the loan amount usually equivalent to 50% to 60% of the investment value and the loan coming at very low interest rates.
ELSS competes with other instruments like Public Provident Fund (PPF), National Pension System (NPS), tax-saving fixed deposit, national savings certificate, etc., for a share of the tax-conscious investor's wallet.
In summary, the 3-year lock-in period for ELSS SIPs ensures a disciplined investment approach while offering potential tax benefits and the opportunity for long-term wealth creation. As with any investment, it is essential to research and understand the risks and potential returns before making a decision.
- Even though fixed deposits offer safety and certain returns, some investors might prefer Equity Linked Savings Scheme (ELSS) funds for their tax-saving and potential long-term wealth creation opportunities, despite the 3-year lock-in period for each SIP installment.
- A key advantage of ELSS funds is the flexibility to continue investing beyond the 3-year lock-in period, although redemption for each part of the investment is only allowed after its corresponding lock-in concludes.
- When compared to traditional tax-saving investments like Public Provident Fund (PPF), National Pension System (NPS), and tax-saving fixed deposit, ELSS funds can provide both accessibility and tax benefits, making them a competitive choice for some investors looking to save taxes and grow their wealth.
