Skip to main content

Equity Linked Saving Scheme (ELSS)

Introduction


There are different types of mutual funds available in the market. Based on the style of investing the 3 well known types of mutual funds are:

  1. Equity Mutual Funds: These mutual funds invest a major portion of their corpus in equity shares and equity related instruments. The aim of this type of mutual fund is to generate long term capital appreciation for the investor. This type of mutual fund is suited to those investors who are looking for high returns and have a high appetite for risk.

 

  1. Debt Mutual Funds: These mutual funds invest a major portion of their corpus in debt instruments like Government Bonds and Securities, Corporate Bonds, Fixed Deposits, Money Market Instruments etc. The aim of this type of mutual fund is to generate regular income for the investor. This type of mutual fund is suited for those investors who are looking to generate regular income for themselves without taking much risk.

 

  1. Balanced Mutual Funds: These mutual funds invest a major portion of their corpus in a mix of equities and debt instruments. The distribution may be in the ratio of Equity 70 and Debt 30 or 50:50 or any other ratio as specified by the mutual fund. The equity component aims at generating long term appreciation and the debt component aims at providing stability and generating regular income.

Equity Linked Saving Scheme (ELSS) is also a type of mutual fund and falls under the Equity Mutual Fund category. An ELSS mutual fund invests major portion of its corpus into equity and equity related instruments. But there are some distinct features which makes ELSS plans different from other equity mutual funds.


Difference between ELSS Plans and Other Mutual Funds


There are 2 major features that make ELSS plans different from other mutual funds:

  1. Income Tax Benefit: Investments made in ELSS plans are eligible for deduction from the taxable income under Section 80C of the Income Tax Act. There is no limit for investments in ELSS plans, but investments of up to Rs 1,00,000 qualify for income tax benefits. Investments made in normal mutual funds (other than ELSS plans) do not qualify for income tax deduction.

 

  1. 3 Year Lock-in Period: Investments made in ELSS plans have a lock-in period of 3 years. In case of normal mutual funds this lock-in period is not there. In an ELSS plan every installments has a lock-in period of 3 years.

Example: Let us assume that a person starts investing on a monthly basis from Jan 2009. The lock-in period of the 1st instilment (Jan 2009) will end in Jan 2012. The lock-in period of the 2nd instalment (Feb 2009) will end in Feb 2012 and so on.


Features of an ELSS Plan

  1. ELSS is an equity linked tax saving investment instrument.
  2. Money collected under ELSS plan is mainly invested in equity and equity related instruments.
  3. This financial product is more suited to those investors who are willing to take high risk and looking for high returns.
  4. There is no upper limit on investments that can be made in ELSS. However investments upto INR 1,00,000 made in ELSS in a financial year qualify for deduction from taxable income under Section 80C of the Income Tax Act.
  5. ELSS comes with a 3 year lock-in period.
  6. Long term capital gains earned on investments from ELSS are tax free.
  7. Also dividends earned from ELSS plan are tax free in the hands of the investor.
  8. The other tax saving instrument that comes closest to comparison with ELSS is Unit Linked Insurance Plan (ULIP).

Options in an ELSS Plan


ELSS plans come with 2 options of growth and dividend.

  1. Growth Option: If the investor selects growth option, he will not get any income during the tenure of the investment. He will get a lumpsum amount at the time of redemption or on maturity. In other words the investor will not get any returns till the time he is holding the instrument and the profit/loss is realized when the securities are sold/transferred.
  2. Dividend Options: Dividends give income tax benefits to the investor.

 

  1. Dividend Re-investment Option: If the investor opts for dividend re-investment option, then any dividends declared are re-invested on behalf of the investor. The investor can claim additional tax benefits on the re-invested dividend amount. For example let us assume that the investor has invested Rs 1 Lakh in the ELSS plan. In the next year the scheme declares a dividend and the investor is entitled to a dividend of Rs 20,000. This dividend is re-invested on behalf of the investor and he gets additional units of the scheme. The investor can claim income tax deduction for this Rs 20,000 from his taxable income as this investment of Rs 20,000 is treated as fresh investment.

Systematic Investment Plan (SIP)


The process of investing a fixed amount on a regular basis (daily, weekly, monthly) in an ELSS mutual fund scheme is known as Systematic Investment Plan or SIP in short. All ELSS schemes come with the SIP option and investors can start with an investment of as low of Rs 500. The minimum SIP investment amount may differ among different mutual fund schemes.


Regular investment through an SIP helps out the investor to tide over the sharp market fluctuations and volatile movement in the prices of shares. SIP averages out the buying price of units over a period of time.


In an SIP, more units are purchased when the market prices are down and fewer units are purchased at the peak times when the prices are high.
Since SIP investments are regular investments, they inculcate the habit of savings in the investors and result in wealth creation in the long term.
Investing through SIP is ideal for salaried people. They can make regular investment through bank ECS facility.


Charges in a Mutual Fund


There are 3 types of charges in an ELSS Plan:


Entry Load: This is the charge levied by the mutual fund at the time of investment. For example if the entry load is 2.25% and the investor has invested Rs 100, the Rs 2.25 will go towards entry load charges and the remaining Rs 97.75 is invested by the mutual fund on behalf of the investor. If the NAV on that day is Rs 10, then the investor will get 97.75/10 = 9.775 units in his account.


From 1st August 2009, Securities Exchange Board of India (SEBI) has abolished the entry load for mutual funds. So now all ELSS plans are free of entry load charges. This effectively means that if the investor invests Rs 100, the full Rs 100 will be invested without deduction of any entry load charge.


Fund Management Charges: This is the recurring charge levied by the mutual fund. This charge is for the day to day expenses of the mutual fund. The maximum permissible by SEBI is 2.5% and the industry average is around 2.25%. This charge is collected by the mutual fund by cancelling equivalent units from the investors account.

Exit Load: This charge is levied by mutual funds when the investor sells the units. In ELSS plans there is no exit load.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

ICICI Prudential Value Fund Series I

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   Performance of the scheme will be benchmarked to the S&P BSE 500 index ICICI Prudential Value Fund is a closeended equity scheme. The scheme will have tenure of three years (1095 days) from the date of allotment of units. Units of the scheme will be fully redeemed at the end of the maturity period, unless rolled over. NFO PERIOD:   The NFO is open from October 18 to 28. The minimum subscription during the NFO period is Rs 5,000. SCHEME OBJECTIVE:   The scheme aims to provide long-term capital growth by investing in a well-diversified portfolio of equity and equity-related securities. INVESTMENT STRATEGY:     The fund proposes to invest in stocks that are trading at a huge discount in the BSE 500 index and plans to book profit and distribute dividen...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now