Equity Linked Savings Scheme
ELSS refers to Equity Linked Savings Scheme. ELSS as the name clearly suggests is a savings scheme linked to equity markets. It is a type of mutual fund, which additionally offers tax benefits to the investors
Key Features and benefits of ELSS are :
- ELSS is a fund with a lock-in period of 3 years.
- It offers tax benefit to the investors under section 80c of the income tax Act up to a maximum limit of 1 Lac per annum.
- Investment has to be for long term, any expectation of short term gains is not appropriate.
- Involves a little bit of risk because of equity allocation.
- ELSS helps an investor to get addicted to investments and savings by offering systematic investment option.
- ELSS is very beneficial to salaried people
- Up to March 31,2005 an investor could claim only rebate under Section 88 if invested in ELSS and the maximum amount that could be invested in ELSS was only Rs.10,000/-. But from March 31, 2006 the investment limit in ELSS has been increased to Rs.1, 00, 000/- and this entire investment is eligible for deduction under sec 80C of Income tax Act, 1961.
Comparison between ELSS and ULIPs :
- ULIPs and ELSS works almost in the similar way as both offers tax benefit. Money will be mostly invested in the equity markets in both the cases. I would like to put before few points which differentiates ULIPs and ELSS.
- ELSS plans are offered by Asset Management Companies, where as ULIPs are mostly offered by Life Insurance Companies.
- ELSS plans does not offer switching facility, but ULIPs offers switching facility to the investors, which helps an investor to safe guard his money in the time of market fluctuations by allowing the switch over of funds from equity to debt instruments.
- The fund management charges in ELSS would always be higher than ULIPs.
- SIP in ELSS is not convenient to investors, as money invested on monthly basis has to be locked for three years from the date of investment of the respective monthly investment. Where as in case of ULIPs investment amount and its return can be taken back after completion of 3 years from the date of first monthly investment made.
- The Investment strategy of ELSS is not that strong when compare to the ULIPs as the investment strategy of ULIPs are governed by law.
Advantages of ELSS over NSC and PPF
- Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years.
- Since it is an equity linked scheme earning potential is very high.
- Investor can opt for dividend option and get some gains during the lock-in period.
- Investor can opt for Systematic Investment Plan.
- Some ELSS schemes also offer personal accident death cover insurance.
- Provides 30 to 40% returns compared to 8% in NSC and PPF.