Should you invest in ELSS funds if your income is below the income tax limit?

ELSS for people below the income tax bracket

ELSS for people below the income tax bracket

ELSS or Equity Linked Saving Scheme is also popular as a tax-saving mutual fund. ELSS has generated an annual return of over 14% in the last decade. ELSS could prove quite beneficial to avail tax benefits and to even invest for the long term. While there is no specific upper limit to the investment amount, you can invest upto Rs. 1.5 lakhs to avail of tax deduction under Section 80C from an income upon which taxes can be imposed. Here on, you have the advantage of flexibility. This allows you to invest across several different companies. The companies you invest in could belong to different sectors, and you can invest your money in any proportion you deem fit. 

ELSS are purely equity funds with similar rules for investing a pool of assets as Flexi cap funds. Thus, one can say that they share a similar investment mandate. However, ELSS or Equity Linked Saving Scheme has a lock-in period of three years. Suppose you invest a fixed amount at regular intervals or monthly through a SIP. In that case, the lock-in period is calculated separately for each monthly instalment counted from the date of each allocation. Let's look at an example to make it easier for you to grasp the concept. Suppose you invested Rs. 2500 monthly through a SIP in January 2020. Thus, the lock-in period of three years for the first instalment will end in January 2023, for the second instalment, the lock-in period will end in February 2023, for the third instalment, it will be March 2023, and so on. You will also be unable to transfer the investment before the end of the lock-in period. Thus, it may lead to liquidity risks.

Related: Debunking 7 myths about ELSS mutual funds

Lock-in Period

The lock-in period might seem short for an equity fund investment. However, if you are not specifically interested in the tax benefits under the Income Tax Act, then your invested money or the ELSS funds would be unnecessarily locked in. Thus, you won't be able to retrieve the money invested in equities. That is why investing in a Flexi-cap fund could be a much better option for you. By investing in a Flexi-cap fund, you can withdraw the invested amount at any time if there is an emergency. 

The lock-in period, however, has its advantages too. If you lack investment discipline or have a habit of withdrawing the investment amount due to short-term market falls, then investing in an ELSS could be beneficial for you. It can save you from panic withdrawing the invested amount for three years, during which you may gain more insight into various investment decisions. If this is the case, investing in an ELSS or a tax-saving fund could benefit you even if you don't need the assured tax benefits. 

Related: Best ELSS funds to consider for investment in 2022

ELSS could improve your investment discipline with one of the shortest lock-in periods among other tax-saving funds. It also provides higher returns, comes with a SIP option, and helps you save some significant tax money. Also, redeeming the investment amount is not compulsory after the lock-in period of three years. However, if you are someone with good investment discipline and patience and if tax benefits are not what you are looking out for, then there is no significant reason or advantage in investing in an ELSS. 

Best ELSS Funds to invest in 2022

Best ELSS Funds to invest in 2022

Related: Is it a good idea to have only ELSS mutual funds in your portfolio?

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