Many of us have heard the term equity; few of us understand what the term means. To understand this, we first need to know how companies work. As you know, most companies considered publicly held or public limited companies. A company is publicly limited when it starts selling ownership stock in the form of market equity shares to generate more funds. Buying such shares allows the investor to claim dividends from the profits of the company.
Many mutual funds are investing to buy these equity shares as a means of providing returns to their investors. Investing in equity shares is not as safe as investing in other investments in the long term securities, but the performances are very high. Many mutual funds diversify their portfolios at multiple companies in different industries to reduce the risk created by investing in stocks. This diversity ensures that as long as the mass market does not decline, some stocks will certainly generate income, even if others fail.
Equity-linked savings schemes or ELSS are a type of diversified equity mutual fund that we have discussed above.
It is a direct mutual fund with ELSS specific terms and conditions, such as term lock-in period and income tax benefits. These funds invest most of their capital in equities and related products.
Mutual funds are the primary options when investing in ELSS.
The first is a growth option where income earns by the fund but not then distributed to individual investors. The return realizes when the investor sells his funds and is considered a long-term capital gain.
The second is the dividend option, where the fund will distribute the income earned by the investment to the investment holders as dividends.
One significant advantage of investing in ELSS is that there is no investment limit, but the investments are eligible for a tax deduction. According to SEC 80C, under the Income Tax Act, any investment up to a maximum of Rs 1.50 lakh in a financial year can be tax-deductible. Often, investment dividends and long-term capital gains are tax-free. However, these funds come with a lock-in period of 3 years, which is a condition on different mutual funds.
ELSS is like any other mutual fund scheme that invests mainly in the stock market. The only difference is that an ELSS comes with a three-year lock-in, meaning that before three years from the date of acquisition, you cannot sell your investment.
Finally, check the AUM (Asset under Management) Fund, past performance and sharp ratios when considering how to invest in mutual funds with ELSS or which funds can provide the highest returns. These will give you an idea of how well the fund can work for you.
Note: If you have a long-term horizon, you can continue to invest in it. If not, withdraw your cache. Equity Linked Saving Scheme (ELSS) cannot redeem before completion of a mandatory lock-in period of three years from the date of investment.