One of the most popular ways of saving tax in India includes investment in ‘Equity Linked Savings Scheme’, commonly known as ELSS.With the start of every new financial year, ELSS becomes the talk of the town. After all, this diversified equity fund can save a lot of your tax while you file your income tax returns; you can save tax up toRs 1.5 lakh per year. Not just tax saving, ELSS offers higher returns on your investment, provided the market conditions are good, and you know how to use it effectively.
Let’s explore more about ELSS investment:
ELSS funds are mutual funds, which are invested in the stock market. However, not all equity mutual funds fall under the ELSS category. The fund house must declare the specific scheme under the ELSS umbrella.Each ELSS fund varies from the other in terms of the choice of stock, proportion of small, mid and large cap stocks and economic trends. Likewise, every fund varies in terms of risk and return.
With different types of ELSS schemes available, you can easily find the one that suits your requirements. For instance, if you want stable returns, you can consider blue-chip companies, or if you want higher returns while taking risks, you can choose small size companies.
How Does It Work?
There are several ways to invest in an ELSS; you can carry out all the investment related procedures on your own or seek professional help. There are three options available for you to invest, which are as under:
- Growth Option: In this option, you do not receiveany dividendsthat may be paid out by the stocks in the mutual fund. By selecting a growth option, you are allowing the fund house to reinvest the dividends. Growth option, thus, helps to prosper your NAV and boost up your profit levels.
- Dividend Option: In this option, you get timely profits as compared to the wholesome amount. The best part of dividend option is that you are not required to pay any tax for the profit you make out from it.
- Dividend Reinvestments option: In this option, you have the flexibility of returning the profits for adding up your NAV. This can prove a good choice provided you find the market performing better during your three years of the lock-in
What is the Expense Ratio in ELSS?
The expense ratiois the annual fund operating expense.Put simply, it’s the cost of managing and running the ELSS fund which includes the cost for fund management, transaction cost, selling or marketing expenses, custodian fees, registrar fees and investor communication costs.
This ratio is calculated as a percentage of the fund’s average net asset value (NAV). The daily NAV that a fund puts out in the public domain comes after deducting the expense ratio.
Unit Linked Insurance Plans (ULIPs):An Alternative To ELSS
Even though ULIPs and ELSS have some similarities, they are very different in terms of their core offerings.ULIP can be a good alternative to ELSS, for the reason that it offers two things at once. A ULIP plan is a combination of insurance and investment; wherein a part of the premium is used to offer you insurance cover, while the rest is used to invest as per your choice of funds.
You can choose to invest with ULIP in areas like equity, hybrid, money market funds, and debt. Additionally, you are entitled to a tax deduction for your annual IT returns. Moreover, if you are considering ULIP for a longer term (10 to 15 years), it can offer you high returns(however, note that returns are market dependent). Further, you can choose to switch from equity to debt or vice-versa as per your investment objective during your investment lifecycle, which is not the case with ELSS.
If your financial objective is to get tax-saving benefit along with life cover, then ULIP is the way to go. ULIP works better for goal-based investments (child education, marriage, retirement) and longer-term investment horizons. The added advantage of insurance coverage gives it a unique edge.