For many investors, planning taxes and creating wealth are two important goals. An ELSS tax saver fund offers the potential to address both. These funds are equity-oriented mutual funds that provide tax benefits under Section 80C of the Income Tax Act, 1961, available only under the old tax regime, while also giving investors exposure to equity markets for potential long-term growth. Understanding how ELSS works, and how to invest in it systematically, can help investors align their tax planning with wealth creation objectives.
What is an ELSS tax saver fund?
An ELSS tax saver fund (Equity Linked Savings Scheme) is a diversified equity mutual fund with a mandatory lock-in period of three years. Investments made in these funds are eligible for a tax deduction of up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961, but only if you opt for the old tax regime. The key features of these funds are:
• Tax benefit: Investments can qualify for deductions within the prescribed limit under Section 80C.
• Lock-in period: With a three-year lock-in, ELSS has the shortest lock-in period among Section 80C options.
• Equity exposure: ELSS funds invest at least 80% of their assets in equity and equity-related instruments.
New regime note: Section 80C deductions, including ELSS, are not available under the new tax regime.
Because of these features, ELSS can be considered both a tax-saving tool and a way to potentially build wealth over time.
Why ELSS funds may be suitable for long-term wealth creation
Equity investments are generally considered suitable for long horizons because they may potentially generate higher returns compared to traditional fixed-income products. Since an ELSS tax saver fund comes with a mandatory lock-in, it can encourage investors to stay invested without reacting to short-term market movements.
Over the long run, this discipline can potentially work in favour of wealth creation. Additionally, because ELSS portfolios are diversified across sectors and companies, they may help reduce concentration risk while still participating in potential growth opportunities.
SIP or lumpsum in ELSS funds
Investors can invest in an ELSS tax saver fund either through a lumpsum or through a Systematic Investment Plan (SIP).
- SIP approach: Contributing regularly through SIPs can spread investments across market cycles. This may reduce the impact of volatility and instill investment discipline.
• Lumpsum approach: A one-time investment may be considered if an investor has surplus funds and wishes to lock in the tax benefit for the financial year at once.
Since the lock-in applies to each SIP instalment individually, SIP investors need to remember that every contribution will have its own three-year lock-in period.
Using a SIP calculator with step up
When planning long-term investments in an ELSS tax saver fund, tools like a SIP calculator with step up can provide an illustrative view of how contributions may potentially grow over time.
A SIP calculator with step up allows investors to:
• Estimate the potential value of their investments at the end of a chosen time horizon.
• Factor in annual increases in SIP contributions to align with rising income levels.
• Compare different scenarios by adjusting contribution amounts, assumed returns, and duration.
This tool may be particularly useful for salaried investors who expect regular income growth and want their ELSS contributions to increase gradually. The calculator is an aid, not a prediction tool. It may provide only an indicative picture.
Things to keep in mind when investing in ELSS
While ELSS funds offer both tax benefits and equity exposure, investors may want to keep a few considerations in mind:
• Risk and volatility: Being equity-oriented, ELSS funds may be subject to short-term market fluctuations.
• Lock-in discipline: The three-year lock-in period can encourage discipline, but investors should be comfortable with limited liquidity during this time.
• Goal alignment: ELSS investments can be aligned with long-term goals such as retirement, children’s education, or wealth accumulation, apart from tax planning.
• Review of fund performance: Even though ELSS investments are locked in, reviewing the fund’s track record periodically may help in making long-term allocation decisions.
Conclusion
An ELSS tax saver fund may be a suitable option for investors who want to combine tax savings with long-term wealth creation. By offering equity exposure along with Section 80C benefits, ELSS can encourage disciplined investing.
Whether investing through SIPs or lumpsum, the focus should remain on aligning contributions with financial goals and risk appetite. Using tools like a SIP calculator with step up can provide a perspective on how investments may accumulate over time.
Ultimately, ELSS should be viewed not only as a tax-saving product but also to potentially participate in long-term wealth-building through equity markets.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
Anantha Nageswaran is the chief editor and writer at TheBusinessBlaze.com. He specialises in business, finance, insurance, loan investment topics. With a strong background in business-finance and a passion for demystifying complex concepts, Anantha brings a unique perspective to his writing.
