How is ELSS outperforming other tax options?

As 2024 begins, the financial year-end draws near!

The months from January to March are the most crucial months for the taxpayers & investors.

Investors scout through Section 80C options as the financial year-end draws near. Investments in these categories can either be non-market-linked or market-linked. Investing in the former involves no risk while investing in the latter exposes investors to fluctuations associated with market movements.

Among the various tax-saving options, ELSS is outperforming. By investing in an equity-linked savings scheme (ELSS), investors can get a tax benefit of up to Rs 1.5 lakh.

About ELSS funds!

ELSS or Equity Linked Savings Scheme is a mutual fund that invests primarily in equities & equity-related instruments. It comes with a lock-in period of 3 years with the advantage of tax benefits under Section 80C.

When it comes to long-term investors looking to increase their wealth and optimize tax savings, ELSS is a particularly advantageous and adaptable option. ELSS investments are particularly well-suited for investors with a high tolerance for risk because they not only help reduce taxes but also promote wealth growth over an extended period.

How is ELSS outperforming other tax options?

Between April 2022 and Jan 2024 - during the first nine months of each fiscal - ELSS has recorded an average monthly net outflow of Rs 77 crore. In comparison, the corresponding figure for January-February-March,  in the same years jumped to Rs 917 crore, according to data released by industry trade body AMFI.

Not only this, among various tax saving instruments, ELSS bears many benefits:

1. Tax benefits

The main reason why so many investors are drawn to ELSS is its tax benefits. Section 80C allows you to deduct up to Rs. 1.5 lakh from your taxable income, which can significantly reduce your tax liabilities. This is especially advantageous for those who fall into higher tax bands.

When compared to other tax-saving options where the deduction may be limited to the principal amount or interest generated, ELSS is even more alluring because it allows for a deduction of the fully invested amount, not just the profits.

The investment must be made within the fiscal year to be eligible for the deduction. Thus, make sure you invest in ELSS by the end of March if you want to take advantage of the tax benefits. The three-year lock-in term on the ELSS funds prohibits redemption before the time expires. On the other hand, you can stretch out your investment using systematic investment plans (SIPs), which may help to reduce market volatility by averaging.

2. Potential for Higher Returns!

The possibility of large returns provided by ELSS is a major draw for investors. ELSS makes investments in equities, which have a history of providing better long-term returns than fixed-income vehicles like PPF or NPS.

The power of compounding returns increases with the length of time you invest in stocks. Substantial variances in wealth growth over time can arise from even small variations in annual returns.

3. Duration of lock-in for long-term returns:

For several reasons, the three-year lock-in period of ELSS is critical in promoting a long-term investment perspective. Over time, the compounding effect can greatly increase wealth. Long investment periods allow returns to be reinvested, producing more returns and promoting exponential development. This is encouraged by ELSS, which emphasizes a dedication to long-term benefits while avoiding short-term volatility.

There are often brief downturns and volatility in the stock market. During these market downturns, the three-year lock-in term acts as a safety measure, keeping investors from dumping their investments out of fear. Investors who keep a long-term investing horizon give the market the time it needs to recover, which could lead to higher returns.

Your investing plan will become more disciplined and consistent as a result of the lock-in period.

4. Diversification

Achieving diversification is a key component of successful investment, and ELSS is essential to this process for several reasons. While traditional fixed-income instruments like bonds and bank deposits offer stability and predictability, their potential returns are often lower than those of equities. ELSS exposes investors to a different asset class with the possibility of higher long-term returns by investing in stocks.

By diversifying the portfolio, the overall risk is reduced and risk-adjusted returns are improved.

Disclaimer: The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose!