By Aakash Manghani
Of the several asset classes readily available to investors for generating wealth more than the extended term, equity as an asset class stands apart. When compared to other asset classes such as debt, gold, true estate and so on, the possible of equity to create a greater true-return more than the extended term is higher. Within the equity asset class, there are various investment solutions for an investor to opt for from and therefore choice of the suitable alternative is important to use the complete possible of equities.
Equity linked savings schemes (ELSS) is one such investing alternative which due to the fact of its exposure to equities delivers an alternative to generate wealth more than the extended term. Through ELSS, you also can participate in the development possible of equities and attain your extended term targets as and when they arise in your life. Further, there are some exceptional characteristics of ELSS and let us see how to make it work to one’s benefit:
Save tax and develop savings
What’s greater than saving tax even even though you watch your cash develop to meet your extended term targets. The investment produced in ELSS scheme qualifies for tax advantage beneath section 80C of the Income Tax Act, 1961. You may possibly invest in more than one ELSS but the maximum tax advantage is capped at Rs 1.5 lakh a year. The tax advantage on investment produced in ELSS is not only at the initial stage but also readily available in the course of the exit or redemption of ELSS units. However, in contrast to in the previous, because 2018, the gains above a particular quantity in ELSS is topic to tax in the hands of the investors. The extended term capital gains tax in equity funds such as ELSS is 10 per cent on gains realised above Rs 1 lakh in a economic year.
Benefit of lock-in period
The quantity in ELSS is locked-in for a period of 3 years such as the quantity invested via SIPs. Each SIP in ELSS will have a lock-in period of 36 months. Incidentally, amongst all the tax-saving solutions beneath section 80C, ELSS has the shortest lock-in of 3 years.
All ELSS funds are pre-dominantly invested in equities which is inherently volatile more than quick to medium term. However, the lock-in period tends to make it work to the benefit of an investor. As your investments gets locked-in for at least 3 years, the temptation to exit based on industry situations does not exist. It also provides the fund manager of the scheme to take aggressive choices in stock choosing for greater threat-adjusted returns in the portfolio.
Once lock-in period ends
After the lock-in period ends, the investment or the fund worth is readily available to you as equivalent to any other open-ended mutual fund. You may possibly redeem partial units or the whole quantity of units or may possibly even continue with the investments for a longer duration. Once the lock-in ends, you may possibly continue with the investments by earmarking the funds for your extended term target. Each year, your investment in ELSS up to Rs 1.5 lakh, not only provides you the tax advantage but also assists in accumulating wealth more than the extended term.
Performance
The overall performance of ELSS funds as a category is in line with the other categories such as that of huge-cap and mid-cap funds. Over longer time frame, the returns have even been observed to be more than some other categories. BOI AXA Tax Advantage Fund is one of the lots of ELSS funds that has shown constant overall performance more than the 1-3-5 year period. The fund is a diversified multi-cap fund possessing beaten the benchmark comfortably more than the extended term. In the ELSS category, the fund is in the best quartile with a nicely-diversified portfolio of stocks.
How to opt for ELSS
If your aim is to create wealth by investing in ELSS funds, the selection of the right scheme holds the key. You may diversify across more than one ELSS but instead of choosing the scheme based on recent performance, make the selection based on scheme’s consistent performance over the long term. Also, some ELSS funds may have high exposure to large-cap stocks while others may be allocated more in mid-cap stocks. While selecting ELSS funds, make sure that there is proper diversification across market-cap and industries. If your goal is to create wealth over the long term and also save tax during the journey, ELSS fits the bill provided you are ready to take short-term volatility in your stride.
(Aakash Manghani is a Fund Manager at BOI Axis MF and the views expressed are his own. Mutual fund investments are subject to market risks, read all scheme related documents carefully.)