Top Advantages of ELSS Mutual Funds

With the AMFI creating widespread awareness about Mutual Funds through its ubiquitous “Mutual Funds Sahi Hai” campaign, ELSS (Equity Linked Savings Funds) have gained in popularity in the past few months. Many investors made the smart move of starting a Mutual Fund SIP in an ELSS at the start of the Financial Year itself, thereby having achieved their Section 80 C targets with relative ease. Those who are entering the last three months of the fiscal with an 80 C gap still pending can consider investing into an ELSS fund via a 3-month STP (Systematic Transfer Plan) from a liquid fund, instead of investing a lump sum of money. Compared to other tax saving options, ELSS Mutual Funds have numerous advantages. Here are some of them:

Better potential for Wealth Creation

All other tax saving options other than ELSS (barring the NPS) provide you with fixed income type returns, that are barely high enough to overcome the effects of inflation. Resultantly, you end up locking in your money for anything from 5 years (for a tax saving FD) to 20 years (for many traditional life insurance plans) for a poor rate of return. ELSS Funds, on the other hand, harness the power of the equity markets, thereby providing better returns over the long run. As a category, ELSS Mutual Funds have generated annualised returns of over 18% over the past five years.

Shorter Lock-in period

ELSS Mutual Funds have a relatively short lock in period of just 3 years, compared to other Section 80 C tax saving instruments that lock in your funds from anything from five to twenty years. However, investors are advised to stay invested for anything from 5 to 7 years in a ELSS, since equity markets can be volatile in the short run.

Potential for Earning Dividends

Investors in ELSS Mutual Funds who choose the dividend pay-out option can potentially earn tax free dividends even before their maturity dates. Although dividends are subject to booked profits, and not guaranteed, most top performing ELSS Mutual Funds have a track records of declaring dividends anything from 1 to 2 times a year. The quantum of the dividends would be dependent on the fund’s performance.

The Mutual Fund SIP Option

ELSS Mutual Funds provide investors with the option of placing their tax savings on auto-pilot, via the SIP (Systematic Investment Plan) route. By calculating their Section 80 C shortfalls early on in the fiscal, and starting a monthly SIP to cover this gap, investors can achieve their tax saving targets without incurring the typical financial yearend stress of scrounging up funds to save taxes! SIP’s also help average the purchase price of your ELSS Mutual Fund units, thereby limiting your downside in the event that markets head south.