Advantages And Disadvantages Of Investing In Equity-Linked Schemes

Equity-Linked Savings Schemes, or ELSS, are funds that derive their returns from the equity markets. They are also tax-saving instruments that are eligible for tax exemption of up to Rs1.50 lakh under Section 80C of the Income Tax Act.

However, despite being a popular investing instruments, ELSS funds have a mandatory lock-in period of three years, during which, investors cannot withdraw their funds.

To begin their investment journey in ELSS, investors have an option of making a lumpsum payment or starting a Systematic Investment Plan (SIP), i.e. investing a set amount at specific intervals.

Like every other investment avenue, ELSS funds also have their share of advantages and disadvantages.

Advantages

1. A SIP into an ELSS fund has a very low investment threshold of Rs500, and there is no maximum limit of investment
2. In the equity markets, the longer the investment, the higher the gains. ELSS funds come with this feature as they have a mandatory lock-in period of three years. Compulsory lock-in period develops a habit of savings
3. They have equity exposure as an asset class which gives the power to generate high returns
4. The SIP investment option in ELSS gives the benefit of rupee cost averaging.
5. It also has the dividend payout option which helps the investor to earn some income during the lock-in period.
6. Both individuals and Hindu Undivided Families (HUF) can invest in ELSS funds.
7. The investor can start or stop the SIP at any time.
8. Earnings after the lock-in period are tax-free provided they are under Rs1 lakh, else the LTCG (long-term capital gains) tax of 10% is applicable. Moreover, LTCG is applicable to positions held over a year and investments held under a year warrant 15% STCG (short-term capital gains) tax.
9. Mutual fund houses undertake transparent transactions as they come under the purview of markets regulator SEBI.
10. The lock-in period is lower compared to bank fixed deposits (FDs), Public Provident Fund (PPF), National Savings Certificate (NSC), and other investment avenues.

Disadvantages

1. The market has too many ELSS funds; this confuses investor when selecting a fund to begin their investment journey.
2. There is a need for higher documentation at the start of the investment.
3. As the funds are exposed to equity markets-related risks, there is no guarantee of returns.
4. The investor cannot prematurely withdraw the funds.
5. The tax benefits are limited as Section 80C allows only a deduction of Rs1.50 lakh inclusive of all investments. So, if the taxpayer has already exhausted their limit with other investments, then they cannot claim a deduction for the ELSS funds.
6. It is not suitable for risk-averse or conservative investors.

The Rundown

ELSS funds are a better choice for individuals looking to save tax and want to earn higher returns from equity exposure. The investor can claim a deduction up to Rs1.50 lakh under 80C, but this includes all investments mentioned in the Section and not just ELSS investments alone. However, the ELSS funds do give a considerable return on investment which makes it more appealing to the investors.