Investing can often feel like navigating a maze, especially when it comes to equity-linked savings schemes (ELSS). If you’re looking to maximize your returns while also saving on taxes, you may have considered investing in ELSS for 2021. With a host of options on the market, making the right choice can seem daunting. This comprehensive guide will walk you through what ELSS is, its benefits, and help you select the best ELSS funds to invest in for 2021.
Understanding ELSS: What You Need to Know
Before diving into which ELSS funds to consider, it’s essential to understand what they really are. An ELSS is a type of mutual fund that allows you to invest in stocks while providing tax benefits under Section 80C of the Income Tax Act, 1961.
Key Features of ELSS
- Tax Benefits: ELSS investments qualify for tax deductions of up to INR 1.5 lakh in a financial year, making them an attractive option for taxpayers.
- Market Linkage: Since they invest predominantly in equities, returns from ELSS are linked to share market performance, potentially leading to higher returns than traditional savings options.
- Lock-in Period: ELSS funds come with a mandatory lock-in period of three years during which you cannot redeem your investment. This encourages long-term investment.
- Diversification: Most ELSS funds provide investors with an automatic diversification of risk, as they invest across a range of sectors and companies.
Why Invest in ELSS in 2021?
The year 2021 presents a unique landscape for investors, with economic recovery from the pandemic, shifting market dynamics, and inflation concerns. Here are some reasons why you should consider investing in ELSS this year:
Rising Stock Market
The stock market has shown signs of recovery post-pandemic, driven by optimistic economic forecasts. This could mean good news for ELSS investors, as the potential for capital appreciation is high.
Tax Planning
With the financial year ending in March 2022, investing in ELSS now can help you meet your tax-saving requirements effectively. Instead of traditional options like Public Provident Fund (PPF), ELSS can offer better growth prospects.
How to Choose the Best ELSS Funds for 2021
When choosing the right ELSS fund, consider multiple factors. Here’s a detailed breakdown to guide your decision-making process.
1. Historical Performance
Examine how consistently the fund has performed over the past 5-10 years. A fund with a consistent track record of beating the benchmark indices may indicate quality management and sound investment strategies.
2. Fund Manager’s Track Record
The experience of the fund manager can make a significant difference in a fund’s performance. Look for managers with a proven track record in managing equity funds, particularly ELSS.
3. Expense Ratio
The expense ratio is crucial as it can eat into your overall returns. Lower expense ratios mean more profits for you, so consider funds that manage costs effectively.
4. Asset Under Management (AUM)
While a higher AUM generally indicates investor confidence, too large an AUM might hinder performance as managers find it challenging to deploy capital effectively. Strike a balance when assessing AUM.
Performance Comparison Table
| Fund Name | 5-Year Return (%) | Expense Ratio (%) | AUM (INR Crores) |
|---|---|---|---|
| Axis Long Term Equity Fund | 14.75 | 1.87 | 23,000 |
| Aditya Birla Sun Life Tax Relief 96 | 12.25 | 1.93 | 18,500 |
| ICICI Prudential Long Term Equity Fund | 13.88 | 2.00 | 19,600 |
| SBI Magnum Tax Gain Scheme | 11.50 | 1.60 | 15,700 |
Top 2 ELSS Funds to Consider for 2021
Now that we’ve covered how to choose the best ELSS funds, let’s explore some of the top-performing options for 2021:
1. Axis Long Term Equity Fund
This fund has consistently been one of the top performers among ELSS schemes. With a solid portfolio management team led by a well-respected fund manager, Axis Long Term Equity Fund has shown impressive returns over the past five years.
- 5-Year Return: 14.75%
- Expense Ratio: 1.87%
- AUM: 23,000 Crores
The fund’s investment strategy focuses on a mix of large-cap and mid-cap companies, providing a balanced approach to growth and stability.
2. Aditya Birla Sun Life Tax Relief 96
Another strong contender in the ELSS space is Aditya Birla Sun Life Tax Relief 96. Managed by experienced professionals, this fund aims for long-term capital appreciation through a diversified equity portfolio.
- 5-Year Return: 12.25%
- Expense Ratio: 1.93%
- AUM: 18,500 Crores
Aditya Birla Sun Life Tax Relief 96 invests in quality companies across sectors, making it a well-rounded choice for investors.
Risks Associated with ELSS Investing
Like any investment vehicle, ELSS also comes with its share of risks. It’s vital to acknowledge these before deciding to invest.
Market Risk
The primary risk associated with ELSS is market volatility. As these funds invest in equities, their value can fluctuate significantly based on market conditions.
Regulatory Risk
Changes in tax regulations or mutual fund laws could impact ELSS funds. Staying informed on any regulatory changes is crucial for any potential investor.
Lock-in Period Concern
The mandatory three-year lock-in period might pose liquidity issues if you need immediate access to funds. It’s essential to have a separate financial cushion in place for emergencies.
Conclusion: Making Your Decision
Choosing the right ELSS fund in 2021 is a strategic move to enhance your financial health while also saving on taxes. By considering the performance, fund manager’s reputation, and expense ratio, you’re better equipped to select a fund that aligns with your investment goals.
Before committing, evaluate your risk tolerance and investment horizon. ELSS can be a rewarding avenue, but like all investments, it requires a careful approach. With the right fund, you can not only enjoy tax benefits but also streamline your path towards wealth accumulation.
Choosing an ELSS for 2021 could be one of the most beneficial decisions you make regarding your financial future. Happy investing!
What is ELSS and how does it work?
An Equity Linked Saving Scheme (ELSS) is a type of mutual fund that primarily invests in equities and provides tax benefits under Section 80C of the Income Tax Act in India. ELSS funds have a mandatory lock-in period of three years, making them a popular choice for long-term investors seeking both capital appreciation and tax savings. By investing in a diversified portfolio of stocks, ELSS aims to offer potentially higher returns compared to traditional tax-saving instruments.
Unlike fixed deposits or Public Provident Funds (PPF), ELSS does not guarantee returns, as it is subject to market risks. However, if selected wisely, ELSS has the potential to deliver significant returns over the long term, driven by the growth of the underlying equity markets. This inherent risk-reward dynamic is appealing to equity investors willing to stay invested for at least three years.
What are the tax benefits of investing in ELSS?
Investors can claim tax deductions of up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act by investing in ELSS. This makes ELSS an attractive option for individuals looking to reduce their taxable income while simultaneously investing in equities. The deductions are applicable only if the investments are held for the mandatory three-year lock-in period.
Additionally, any gains made upon redemption of ELSS units after the lock-in period are subject to Long-Term Capital Gains (LTCG) tax. As of now, if the total capital gains exceed ₹1 lakh in a financial year, a tax of 10% is imposed on the gains beyond this threshold. This structure makes ELSS tax-efficient compared to other investment options, especially when considering the potential for capital appreciation.
What is the minimum amount required to invest in ELSS?
The minimum investment amount for ELSS varies depending on the specific fund and the Mutual Fund house. Typically, most ELSS funds allow investments with a systematic investment plan (SIP) starting from as low as ₹500 to ₹1,000. A one-time lump-sum investment may require a minimum amount ranging from ₹1,000 to ₹5,000, depending on the fund’s guidelines.
It’s important to check the specific terms of the ELSS fund you are considering before investing. Investors have the flexibility to increase their investment through SIPs, making it easier for anyone to start investing in ELSS, irrespective of their financial background.
How should one choose the right ELSS fund?
Choosing the right ELSS fund requires careful consideration of various factors such as past performance, fund manager track record, and the expense ratio. A fund’s historical performance can give you insights into its consistency in generating returns, but it should not be the sole deciding factor. Investors should look for funds that have performed well compared to their benchmark and peer group over a relevant time frame.
Another crucial aspect is the fund manager’s experience and investment strategy. A seasoned fund manager with a proven track record of navigating market cycles can be an asset. Additionally, evaluating the expense ratio is vital, as lower expenses can lead to higher net returns over the investment horizon. Investors should conduct thorough research and perhaps consult with a financial advisor to choose an ELSS that aligns with their financial goals.
Is there a risk associated with investing in ELSS?
Yes, investing in ELSS does come with inherent risks, as these funds primarily focus on equities. The stock market is volatile, and the value of your investment can fluctuate based on market conditions. While the mandatory three-year lock-in period may shield investors from short-term market volatility, it’s essential to remain aware of the risks associated with equity investments even over the long term.
However, the risk can be mitigated by investing in well-managed ELSS funds that maintain a diversified portfolio. Adopting a disciplined investment approach and having a long-term perspective can help investors navigate market turbulence and potentially benefit from the wealth-creation opportunities that equities can offer over time. It’s crucial for investors to assess their risk tolerance before making any investment in ELSS.
Can I invest in ELSS through a SIP?
Yes, investing in ELSS through a Systematic Investment Plan (SIP) is a popular and effective method. SIP allows investors to contribute a fixed amount regularly, typically monthly, which can help in rupee-cost averaging. This means that you can buy more units when prices are low and fewer units when prices are high, thus minimizing the impact of volatility on your investment.
SIP investments in ELSS funds also help inculcate the habit of disciplined savings and investment over time, making it easier for individuals to invest without having to pay a large sum upfront. This method can be particularly advantageous for new investors who may wish to gradually increase their investment exposure to equities in a structured manner.
What are the lock-in periods for ELSS investments?
ELSS investments come with a mandatory lock-in period of three years, during which investors cannot withdraw their funds. This lock-in is designed to encourage long-term investment and mitigate short-term market fluctuations. The three-year period is measured from the date of investment, and upon maturity, investors are free to redeem their units without any penalties.
It is worth noting that while the lock-in period can be viewed as a restriction, it also serves a strategic purpose. Investors who commit to a longer horizon may benefit from the potential growth of equity markets and can experience wealth creation over time. It’s essential for investors to plan their financial goals accordingly to align with this lock-in period effectively.
How does ELSS compare with other tax-saving instruments?
When compared to other tax-saving instruments like Public Provident Fund (PPF), National Pension System (NPS), and Fixed Deposits (FDs), ELSS stands out due to its potential for higher returns over the long term. While PPF and FDs offer fixed and guaranteed returns, ELSS investments are linked to equity markets, which historically have yielded higher returns, albeit with greater risk.
In terms of tax benefits, ELSS allows deductions under Section 80C, similar to PPF and NPS. However, ELSS’s primary advantage lies in its shorter lock-in period of three years and its capacity to provide market-linked growth. Therefore, for investors looking at tax savings combined with the potential for capital appreciation, ELSS may be a more suitable option than traditional tax-saving avenues that offer lower returns and longer lock-in periods.