Equity-Linked Savings Schemes (ELSS) are a great way to save on taxes while growing your wealth. If you're thinking about investing in ELSS, it’s important to know what it is, how you can invest, and which platforms to use. This blog will explain ELSS in simple terms and guide you on how to get started.
Before we talk about ELSS, let’s quickly understand mutual funds:
Mutual Funds pool money from different investors to invest in a mix of stocks, bonds, or other assets. The goal is to help investors achieve good returns while spreading the risk across various investments.
Key Features of Mutual Funds:
✅ Diversification: Spreads your money across different investments, reducing the risk of losing it all on one asset.
✅ Professional Management: A fund manager makes investment decisions, saving you the trouble of doing it yourself.
✅ Liquidity: You can usually buy and sell mutual fund units on any business day, offering flexibility.
Equity-Linked Savings Schemes (ELSS) are a type of mutual fund that invests mostly in stocks. These schemes are special because they offer tax benefits under Section 80C of the Income Tax Act, while also aiming to grow your money by investing in the stock market.
Key Features of ELSS:
✅ Tax Benefits: You can save up to ₹1.5 lakh per year on taxes by investing in ELSS.
✅ Lock-in Period: ELSS has a mandatory lock-in period of three years, shorter than many other tax-saving options.
✅ Growth Potential: Because ELSS invests in stocks, it has the potential to provide higher returns over time.
When you invest in ELSS, you can choose between two main methods: Systematic Investment Plan (SIP) and Lump Sum Investment. Here’s a quick overview:
1. Systematic Investment Plan (SIP)
What is SIP?
A Systematic Investment Plan (SIP) lets you invest a fixed amount regularly (like monthly) into an ELSS fund. You can start a SIP with as little as ₹100 to ₹500 per month, making it easy to begin investing.
Advantages:
✅ Average Purchase Cost: By investing regularly, you buy fund units at different prices, which helps balance out the overall cost.
✅ Discipline: Encourages regular saving, making it easier to build wealth over time.
✅ Affordable Start: You can start investing with a small amount, which is great for beginners.
Disadvantages:
❌ Slower Returns in Rising Markets: In a quickly rising market, SIPs might not capture as much gain as a lump sum investment.
❌ Regular Commitment: Requires you to invest regularly, which might be tough for some.
2. Lump Sum Investment
What is Lump Sum Investment?
Lump sum investment is when you invest a large amount of money all at once into an ELSS fund. This is suitable if you have a significant amount to invest and prefer a one-time contribution.
Advantages:
✅ Immediate Market Exposure: Your entire investment starts working right away, which can be beneficial in a rising market.
✅ Potential for Higher Returns: If invested at the right time, lump sum can yield higher returns.
Disadvantages:
❌ Market Timing Risk: The risk of investing at the wrong time can affect your returns in the short term.
❌ Higher Initial Amount: Requires a larger sum upfront, which might not be feasible for everyone.
Here are different ways you can invest in ELSS:
1. Directly Through Mutual Fund Companies
Examples: HDFC Mutual Fund, ICICI Prudential, SBI Mutual Fund, Quant Mutual Fund, Aditya Birla Sun Life Mutual Fund
Advantages:
✅ Lower Costs: Direct investments typically come with lower fees since there are no middlemen.
✅ Direct Service: You communicate directly with the fund company, which can simplify things.
Disadvantages:
❌ Limited Tools: Harder to compare different funds or access in-depth analysis.
❌ Complex for Beginners: Might be a bit complicated for first-time investors.
How to Invest: Visit the mutual fund company’s website, complete the KYC process, and invest directly.
2. Online Investment Aggregators
Examples: Groww, Zerodha, ET Money
Advantages:
✅ User-Friendly: These platforms make it easy to compare and invest in various ELSS funds.
✅ Research Tools: They offer tools and insights to help you make informed decisions.
Disadvantages:
❌ Platform Fees: Some may charge small fees or commissions.
❌ Third-Party Support: You might not get direct support from the fund house.
How to Invest: Sign up on the platform, complete the KYC process, and choose from a range of ELSS funds. Investments can be made via SIP or lump sum.
3. Mobile Apps by Fund Houses
Examples: HDFC Mutual Fund App, ICICI Prudential App
Advantages:
✅ Direct and Convenient: Allows you to invest directly with the fund house using a mobile app.
✅ Lower Fees: Similar to direct investments, usually lower costs.
Disadvantages:
❌ Limited Options: You can only invest in the funds offered by that particular house.
❌ Less Comparison: Harder to compare with other funds.
How to Invest: Download the app, complete the KYC process, and start investing in ELSS funds offered by that fund house.
4. Third-Party Platforms
Examples: CAMS, KFintech (formerly Karvy)
Advantages:
✅ Centralized Management: Manage investments in multiple funds from one place.
✅ Convenient Access: Access consolidated statements and manage your portfolio easily.
Disadvantages:
❌ Service Fees: Might charge fees for their services.
❌ Additional Processing Time: Transactions and support might take a bit longer.
How to Invest: Register on the platform, complete the KYC process, and invest in ELSS funds from various fund houses.
5. Financial Advisors and Distributors
Advantages:
✅ Personalized Advice: Get customized investment advice and planning.
✅ Hassle-Free: Advisors take care of everything from paperwork to portfolio management.
Disadvantages:
❌ Higher Costs: Advisors may charge fees or earn commissions, increasing your costs.
❌ Potential Bias: Recommendations might be influenced by commissions.
How to Invest: Consult with a certified financial advisor or distributor, discuss your needs, and they will guide you through the investment process.
Equity-Linked Savings Schemes (ELSS) are a smart choice for those looking to save on taxes and grow their wealth. With a clear understanding of what ELSS is and the different ways to invest whether through direct investments, online platforms, or with the help of advisors, you can make informed decisions that align with your financial goals. Take the first step today and explore your options to start investing in ELSS.
