ELSS: Beyond tax savings - Exploring the growth potential of equity investments

Equity Linked Savings Scheme (ELSS) funds can be a suitable investment option for investors seeking to optimise their tax liability. However, while the tax benefits of ELSS are quite known, not many investors are aware of the ELSS fund growth potential in equity investment.

In this article, we will explore the ELSS growth potential in equity fund investment and how it can potentially contribute towards your long-term financial goals.

• Table of contents

1. Understanding the growth potential of equity investments in current market condition
2. How ELSS fund help in growth contribution
3. ELSS fund vs other investment options

Understanding the growth potential of equity investments in current market condition

The Indian equity market has witnessed significant ELSS fund growth in equity investment in the past few years. The growth has been driven by various factors such as reforms, policy initiatives, and a favourable macroeconomic environment.

Therefore, the current economic conditions present a unique opportunity for investors to capitalise on the growth potential of equity investments. Moreover, the market is expected to continue its upward trajectory, driven by various factors such as a recovering economy, favourable demographics, and increasing foreign inflows.

How ELSS fund help in growth contribution

• ELSS funds are equity-linked mutual fund schemes that invest primarily in equity and equity-related securities. These funds offer tax benefits under Section 80C of the Income Tax Act, 1961 making them a suitable option for investors looking to save taxes.
• Apart from tax benefits, ELSS funds also offer the potential for capital appreciation due to their equity exposure. ELSS funds invest in a diversified portfolio of stocks across various sectors and market capitalisations, providing investors with exposure to the broader equity market.
• ELSS funds also offer the benefit of professional fund management, which can help in identifying investment opportunities, managing risks, and generating return potential. ELSS fund managers have the expertise and resources to conduct thorough research, analyse market trends, and make informed investment decisions.

Additionally, by investing in ELSS funds, investors can also avail themselves of several other potential benefits:

• Long-term capital appreciation: ELSS funds have a lock-in period of three years, which encourages investors to stay invested for the long term. Over this period, investors can potentially benefit from the compounding effect of capital appreciation, as the value of their investments grows over time.
• IDCW: Some ELSS funds also provide regular Income Distribution Cum Capital Withdrawal (IDCW) pay-outs to investors. These can be reinvested or used as a source of income, further enhancing the growth potential of the investment. However, reinvestment will result in further lock-in period for 3 years. Also, the NAV will fall to the extent of IDCW payouts and statutory levy, if any.

ELSS fund vs other investment options

When compared to other investment options, ELSS funds offer certain advantages in terms of growth potential and tax benefits. Let's explore how ELSS funds stack up against traditional investment products:

• Fixed Deposits: While fixed deposits offer capital preservation and guaranteed returns, they often fail to keep pace with inflation. ELSS funds, on the other hand, have the potential to generate inflation-beating returns over the long term.
• Public Provident Fund (PPF): PPF is a popular long-term investment option due to its tax benefits and fixed returns. However, ELSS funds have the potential to deliver higher returns, as they are linked to the performance of the equity markets. Additionally, ELSS funds have a shorter lock-in period of three years, compared to the 15-year lock-in period of PPF.
• National Savings Certificate (NSC): NSC offers fixed returns and is considered a stable investment option. However, ELSS funds offer the opportunity to participate in the growth potential of equity investments, which can lead to a higher return potential over the long term.

Conclusion
ELSS funds offer investors the dual benefit of tax savings and long-term growth potential. By investing in these funds, individuals can not only save taxes but also participate in the growth potential of equity investments. With their diversified portfolios and experienced fund managers, ELSS funds can be a suitable investment avenue for potentially meeting one’s long-term financial objectives.

FAQs

Are ELSS funds suitable for all investors?
ELSS funds are suitable for investors with a long-term investment horizon and a moderate to high risk appetite. It is important to consider your financial goals and risk tolerance before investing in ELSS funds.

Can I invest in ELSS funds through a Systematic Investment Plan (SIP)?
Yes, most ELSS funds offer the option to invest through SIPs. SIPs allow investors to invest a fixed amount at regular intervals, helping them benefit from rupee-cost averaging and potentially reducing the impact of market volatility.

What is the lock-in period for ELSS funds?
ELSS funds have a lock-in period of three years. This means that investors cannot redeem their investments before the completion of three years from the date of investment.

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.