ELSS is a must have in your portfolio

ELSS is a must have in your portfolio

• Understanding ELSS
• ELSS fits for every investor
• ELSS can be used in many ways beyond tax savings

Investing means different things to different people, yet there are several aspects of investing that remain the same across investors. For instance, there is risk involved when investing. Yet, there is an investment instrument that is universally useful for every investor. Among the various types of mutual fund schemes, one stands out the most – the ELSS (equity linked saving scheme), which is often assumed to be just a tax saving mutual fund. It actually deserves a lot more appreciation than it deserves.

Many investors think of ELSS as a tax saving option and no more. However, ELSS could be an ever present investment in an investor’s portfolio for the numerous advantages that it has and the flexibility with investments that it offers. Here are several advantages of investing in ELSS at any stage of your life and any phase of your investment journey.

Beyond tax savings: Although investments in ELSS qualify for tax savings under Section 80C of the Income Tax Act, one could invest in them otherwise too. Investments in ELSS have the potential to build wealth in the long run. Besides, one could invest in ELSS through SIP and SIP variants. The advantage of SIP is well documented; however, one form of SIP which stands out is the one which combines life insurance with SIP at no additional costs. This form of SIP variant merges investment and contingency plan by adding the benefit of life insurance cover with the regular SIP. By adopting this approach, you could benefit from ELSS investments for wealth creation and protection.

Go anywhere approach: One stifling aspect of investments in most equity mutual funds is that they are broadly governed by the type of allocation based on market capitalisation they could follow based on the SEBI circular on Mutual Fund Categorization and Rationalization. However, there is no such restriction on allocation based on market capitalisation in case of ELSS. These funds could follow a large-cap, mid-cap, multi-cap or any such combination of allocation based on market capitalisation without any restrictions. Further, as per Income Tax Action 1961, the ELSS is an equity mutual fund, in which investments qualify for tax deductions under Section 80C of the income tax up to Rs 1.5 lakh in a financial year. Moreover, investment in ELSS has a minimum 80% equity exposure that could technically go up to as much as 100%. But unlike other equity mutual fund schemes that are classified based on their market capitalisation or investment style by the regulator, ELSS has no such restrictions. So, investments in ELSS could go across market capitalisation in any proportion that the fund manager and the AMC choose to, as long as it is stated in its investment objective and portfolio disclosures. This makes ELSS a very flexible investment option among the many mutual funds that exist.

Income stream in retirement: Generally retirees and senior citizens may have lower tax saving commitments, which makes ELSS favourable for the flexibility it offers and the lowest lock-in of 3 years among other tax savings options. This aspect works favourably for retirees who benefit from the short lock-in. Moreover, the short lock-in, especially if they use the SIP route to investing ELSS, allows them to supplement existing income stream every month through redemptions from the ELSS they invest in which could be made tax efficient within the applicable and prevalent income tax rates. For Instance, ELSS SIP investments in one year would create a monthly redemption stream from the 4th year and so on.

Retirement corpus: Savings towards retirement are often low on priority at a younger age. However, one could use ELSS to not just save on income tax; one could use the investments in ELSS as a dedicated long-term retirement planning tool. For instance, each ELSS when it is ready for redemption after the 3 year lock-in; could continue, and be treated as a dedicated retirement savings. This could be a way to create a disciplined retirement savings strategy.

So, if a tax saver at age 25 earmarks Rs 1 lakh each year to invest in ELSS towards tax savings; over the next 25 years, not only would there be significant tax savings each year depending on the tax slab the investor falls in; there would also be wealth creation towards their retirement corpus.

There are many ways to use ELSS for every type of tax saver and investor. Even for the uninitiated, ELSS functions as a good first mutual fund investment for the tax savings it offers and the short lock-in which allows investors to observe how investments in ELSS work. This lesson from ELSS investing can help investors broaden their investment horizon and investment across other mutual funds to plan their life’s financial goals.

Next steps

1. Understand the flexibility of ELSS
2. Choose an ELSS
3. Use ELSS for other financial goals