25th November 2020
Finance

What makes an ELSS the ideal first mutual fund?

Equity Linked Savings Scheme (ELSS) is a diversified mutual fund scheme which offers the dual advantage of capital appreciation and tax savings to investors. You can claim anELSS tax benefit under Section 80C of the Income Tax Act up to Rs.1.5 lakh in a financial year.

Besides, an ELSS tax saving fund has a mandatory lock-in period of three years, the lowest compared to other investment products under Section 80C.

This article looks at the many salient features of ELSS that make it an ideal mutual fund choice for new investors.

Understanding ELSS

As noted earlier, ELSS funds have the lowest lock-in period of three years. Mutual fund advisors believe this durationcan help investors get acquainted with market ups and downs that canaffect equity mutual funds.

Since investors do not have the option to withdraw their funds before the maturity of the lock-in period, they would need to stay put instead of accessing their funds prematurely. This can teach new investors a valuable lesson in investing in equities.

Experts recommend investors to stay focussed on their financial plan, rather than veering away from it when the market experiences a turmoil. Staying persistent is strongly endorsed, especially for a long term horizon as markets can weather the volatility and help you reap good yields in the long run.

How do mutual fund portfolio managers benefit from the mandatory lock-in period?

Expert mutual fund advisors believe it is not just investors who benefit from the mandatory lock-in period, but portfolio managers also stand to gain. For instance, managers do not have to deal with the undue pressures of short-term fund underperformance. Instead, they can place long-term bets with a long-term investment horizon, thus helping investors earn enhanced returns. When yields are reasonable, it can help boost the confidence of new investors in mutual funds, and give them the confidence to explore other equity fund schemes as well.

Other benefits of investing in ELSS

Here are additional benefits that can help compare ELSS v/s mutual funds:

  • Higher returns

Most ELSS funds follow a multi-cap strategy; they invest almost 80% in equity and equity-related instruments. Thus, such funds candraw good gains compared to other investment tools such as Public Provident Fund (PPF) and National Savings Certificate (NSC).For instance, PPF has generated 8% returns in the past, whereas ELSS have generated 12% returns. [i]

  • No maturity date

ELSS funds have a lock-in period of three years, but you can continue to invest for as long as you need to meet your financial goals.If the scheme is performing well, you can keep re-investing in the same scheme or switch to another based on your investment goals.

Conclusion

To summarize, if you are looking to invest in mutual funds, ELSS can be an ideal investment scheme to consider. Apart from enjoying ELSS tax exemption up to Rs.1.5 lakh under Section 80C, you can also gain exposure in equity mutual fund investments.It can help you get accustomed to the market fluctuations and become more patient as an investor.

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