Equity-linked saving scheme ELSS is a popular tax saving instrument that is opted for by investors for its multiple benefits. Offered by various asset management companies, the DSP Mutual Fund is known for its twin benefits of investment and growth and tax protection under the 80C section of the Income Tax Act. The following article explores the risks and rewards associated with investment into an ELSS fund thereby helping investors to make accurate decisions for their investment portfolio:
Equity-linked saving scheme (ELSS): Meaning
The equity-linked saving scheme is a tax-saving mutual fund scheme that is linked to equity investments. With a 3-year lock-in period, the ELSS fund offers better liquidity as compared to other forms of investments like PPF and delivers long-term wealth creation benefits. The following are the benefits of investing in DSP ELSS funds:
Taxation benefits
Investment into the ELSS fund head investors to receive a deduction from there to financial income up to ₹1,50,000 under section 80 C of income tax act. The government of India allows investors to claim the invested amount in ELSS funds as a deduction from their taxable income in a financial year.
Growth and higher returns
With investment into equity, ELSS funds offer the potential to generate higher returns which when compared to other forms of investments like FDs and PPF are better in terms of overall growth. Moreover, investors concentrate an extensive amount of wealth on investments in ELSS funds while other forms of investment have not been delivered over the long term.
Portfolio diversification
Investment in ELSS funds even serves as a source of portfolio diversification. With investments across various sectors and companies with multiple market capitalisations, ELSS funds can help investors to diversify their investments across various sectors with minimal risk at the same time.
Short lock-in period
The lock-in period associated with an investment in ELSS funds is also low when compared to other investment avenues like fixed deposits for five years and PPF for 15 years. The lock-in period for the ELSS fund is 3 years making it a perfect choice for investors who prefer high liquidity.
ELSS fund investment: Risks
The negative effect of market volatility:
ELSS fund involves investment into equities which are associated and affected by changes in the market sentiment. Therefore with extensive market volatility, the returns from ELSS funds can be affected which in turn can lead to short-term losses for investors.
No withdrawals
With a lock in period of three years, investors who preferred liquidity, may not consider investment into ELSS Mutual funds. Investors do not receive the flexibility and authority to opt for premature withdrawals before the 3-year lock in period even in case of an avoidable and unforeseeable emergency.
Long-term capital gain tax
Though investors receive taxation benefits from investment in ELSS, A profit of more than ₹1 lakhs in a financial year is taxed at ₹10 percent under the long-term capital gain tax regime. This rule can discourage various investors who invest in ELSS with the viewpoint of saving tax money.
Conclusion
DSP ELSS mutual funds are known for its twin rewards and risks. Investors therefore must opt for a complete research before selecting the ELSS fund for their investment portfolio. Both the risk and the rewards must be analysed before considering investment into the DSP ELSS fund.
