Debunking 7 myths about ELSS mutual funds

Let us debunk some common myths around these investment instruments.

Debunking 7 myths about ELSS mutual funds

Section 80C of the Income Tax Act in India allows taxpayers to invest up to Rs 1.5 lakh in certain securities like Public Provident Fund (PPF), 5-year bank fixed deposit (FD), National Savings Certificate (NSC), National Pension Scheme (NPS), and Equity Linked Savings Scheme (ELSS). Of these, ELSS is considered the best option as it gives three-pronged benefits: higher returns, significantly shorter lock-in periods, and higher tax savings (since returns from ELSS mutual funds are only partially taxable).

Despite this, research shows that many people prefer to stick to conventional options like bank FDs, despite their (generally) much lower returns. The reason is not hard to guess: ELSS mutual funds are linked to the stock market, which has traditionally been considered a highly risky place to invest in. However, once you get clarity on ELSS, you’ll soon realise that the risks are usually eclipsed by the benefits.

Here are 7 common misconceptions about ELSS funds:

1. ELSS funds are locked in for 3 years and automatically redeemed after that

Yes, ELSS funds do have a lock-in period of 3 years. However, there’s more to it. Firstly, the 3-year lock-in period starts at the time of investment. So, if you’re investing the entire amount all at once, your investment will have one fixed date for your lock-in period. But if you’re investing on a monthly basis via a Systematic Investment Plan (SIP), the lock-in period for a certain amount starts from the day it was invested. So, your lock-in period could go up to 4 years instead of 3, from your first amount invested. 

And no, ELSS mutual funds are not automatically redeemed after 3 years. You can continue to keep your money invested in them – in fact, experts recommend that you do this as it increases your chances of making higher returns.

Related: ELSS vs NPS: Which one can help you save more tax and grow wealth? 

2. One can invest only up to Rs 1.5 lakh in an ELSS fund

While the tax-saving limit for investments in ELSS funds under Section 80C is Rs 1.5 lakh, you can always invest more in these instruments. However, you should keep in mind that the returns on any investment in an ELSS that exceeds Rs 1.5 lakh in any given financial year will be taxable as per your tax bracket.

3. One has to invest all the money in a single ELSS fund to avail of tax benefits

Another interesting fact about investing in an ELSS is that you don’t have to put all your money into one fund. Of course, you can choose to do so, or you can take the more strategic route of investing across the best ELSS funds. This can help you lower your investment risk and maximise your returns.

Related: 9 Financial products and their tax benefits 

4. ELSS funds are suitable for short-term investment

ELSS mutual funds have a lock-in period of 3 years; therefore they are often considered to be a short-term investment option. However, since an ELSS fund invests in stocks, it is advisable for you to maintain a long-term outlook on this investment. Staying invested in ELSS for at least 5 years has shown to significantly reduce the probability of making a loss; usually it increases your returns over time.

5. Investing in ELSS calls for a lump sum amount

If you’re not comfortable making a large investment in one go, you can rely on a Systematic Investment Plan (SIP) that lets you invest a certain amount every month through the year. In such a case, if you’re considering ELSS for only tax-saving purposes, you’d be investing Rs 12,500 every month rather than Rs 1.5 lakh at one go.

Related: Mutual funds and firsts: How I bought my car, home and traveled the world 

6. All ELSS funds are the same

Since ELSS funds do not have to follow clearly defined mandates of exposure like other mutual funds, they have the freedom and flexibility to invest across market caps. As a result, you will find various types of ELSS funds, ranging from those with mostly large-cap or small/mid-cap portfolios, to those with sensibly balanced portfolios. Since each of these would come with different levels of risk, you should choose one that matches your risk appetite.

7. Returns from ELSS is tax-free

While returns from investments made in ELSS funds were not taxable earlier, the situation changed on 31 March 2018, when such returns were deemed taxable at a concessional rate of 10% if the amount exceeded Rs 1 lakh in a Financial Year. 

Now that you know the reality about ELSS, go ahead and pick the best ELSS funds and reap the maximum benefits for your investment! Read this to know how savvy millennials betting big on Mutual Funds.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.

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