Benefits of Investing in ELSS for Beginners

Investing in ELSS or Equity-Linked Savings Schemes is an excellent option to start with for first-time investors. Not only does it provide tax relief under Section 80C, but it also offers the possibility of wealth creation by investing in equity. ELSS funds are among the best tools for generating long-term wealth, especially for first-time investors. With a 3-year lock-in, ELSS encourages disciplined investing while offering tax benefits and growth potential. Thus, it makes it a good option for first-time investors willing to take some equity risk.

What Exactly Is ELSS?

Equity-Linked Savings Schemes are mutual funds that invest largely in equity shares. According to recent amendments, it must hold at least 80% of its assets in shares. But what sets ELSS apart from other tax-saving mutual funds is the brief lock-in period of merely three years. Compared to PPF’s 15-year and NSC’s 5-year lock-in, ELSS, with just 3 years, offers more flexibility for new investors, though it involves market risk.

You get up to ₹1.5 lakh tax deductions under Section 80C, and your money grows faster with equity exposure. ELSS is thus suggested to new earners and first-time investors.

Benefits of ELSS

ELSS offers a range of benefits, including significant tax benefits to the potential for long-term wealth creation, making it an excellent investment instrument for beginners. The key benefits are:

• Tax Benefit: The biggest motivation for investors to invest in ELSS is to save tax. You can claim a deduction of up to ₹1.5 lakh under Section 80C, which will reduce your tax payable and save you thousands in the bargain.

• Long-Term Appreciation: Since ELSS invests in equities, there is every chance your money will appreciate more in the long term compared to fixed-income instruments.
• Only 3-Year Lock-In: You must keep your money locked in for three years—the shortest among tax-saving options under Section 80C.
• Start Small with SIPs: Even if you do not have much money to invest, you can start a Systematic Investment Plan (SIP) with as little as ₹500 a month.
• Diversification: ELSS funds invest across sectors, which works to decrease the risk level compared to investing in a single stock.

How to Get Started with ELSS

Follow these steps to get started with ELSS:

• Select the Right Fund: Compare different ELSS funds on reliable websites. Look at their past performance, fund manager record, and risk level.
• SIP or Lump Sum?: If you are new to investing, SIPs are a good option for investing in annual instalments. A lump sum is better if you invest during tax season. Just remember, each SIP instalment will have its 3-year lock-in.
• Complete Your KYC: Complete your Know Your Customer (KYC) process before investing. Most online platforms make this easy and quick.
• Monitor Your Investments: Once you’ve invested, don’t forget to check your fund’s performance periodically. Adjust if needed, especially as your goals or income change.

Recommended Read: How to Invest in ELSS Mutual Funds?

Types of ELSS Funds

There are various types of ELSS funds designed to suit various risk profiles and investment time horizons, allowing investors to make a personalised choice. They are:

• Large-Cap ELSS: These focus on well-established companies and are generally less volatile, ideal for cautious investors.
• Multi-Cap ELSS: They invest in a mix of large-cap, mid-cap and small-cap stocks, balancing risk and growth.
• Thematic ELSS: They focus on a specific sector or theme (like IT or healthcare) and are best for investors with a higher risk appetite.

Advanced ELSS Strategies

For seasoned investors, advanced strategies can maximise returns without watering down risk on your ELSS investments. They include:

• Combine With Other Tax-Saving Vehicles: ELSS can be combined with other vehicles like EPF or life insurance while making your 80C shift.
• Invest for Longer Durations: Although the lock-in is three years, most experts suggest staying longer to earn better returns.
• Diversify Your Portfolio: Invest in ELSS independently. Combine it with debt or gold funds to maintain overall risk in check.
• Begin Early in the Year: Don’t wait until March! The early beginning of your ELSS SIPs gives you ample time to plan and minimal last-minute hassles.

Recommended Read: How to Plan ELSS Investments?

Conclusion

ELSS is not only an investment that reduces tax, but also a door to investment in equity. It saves you tax and generates wealth in the long term through the power of equities. The convenience of investing in small units in the form of SIPs and the flexibility of choice of offering returns greater than traditional fixed-income schemes make ELSS a smart choice for first-time investors.

Similar to all equity investments, ELSS has its own set of risks. Markets fluctuate, and returns are not assured. Then there’s the three-year lock-in period, you cannot withdraw the money during that period, so manage your finances accordingly. Not all ELSS funds work equally well, so research them before investing.