Benefits & Limitations of Investing in ELSS Funds

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ELSS or Equity Linked Saving Schemes refers to the category of mutual funds that is a blend of two purposes, i.e. creating wealth and saving taxes. In recent times, ELSS tends to be one of the most popular and efficient tax-saving instruments. ELSS is a type of equity diversified fund which invests the majority of its assets in equity shares of several companies.

How do ELSS funds work?

A fund manager maintains a well-diversified portfolio by allocating various resources across some sectors, industries and market capitalization. The Net Asset Value or intrinsic value of one unit of the fund fluctuates with the volatility of the market and other economic factors. The fund attempts to generate returns which in turn results in capital appreciation and tax benefits over the long term.

In this blog, we will talk about the advantages and disadvantages of investing in ELSS funds. Let us have a look at a few points below.

Benefits of ELSS Funds: -

1.   Access to Equity

Through investment in ELSS funds, one gets access to investing in equity while saving taxes because ELSS mutual funds invest most of their corpus in equity. Equity has a great potential to earn high returns on investment as it invests in shares of several companies. Thus, investing in ELSS funds is a great option if one does not wish to directly invest in equity and still reap the benefits of it, while of course the risk appetite should be studied before one dives into equity any which way.

2.   Shortest Lock-in period

As compared to other investment options like Public Provident Fund (PPF), National Savings Certificate (NSC), etc., ELSS has the shortest lock-in period of three years. Hence, ELSS is a beneficial mode of investment.

3.   Diversification

ELSS mutual funds are equity-linked mutual funds that invest in various companies thus making the best utilization of diversification. As an investor, one gets an opportunity to diversify their portfolio through ELSS as well.

4.   Potential to Deliver High Returns

ELSS funds can offer payouts that are higher than a basic savings plan as they invest their funds in equity. Over a period of a few years, one can notice that ELSS fund returns give substantially high returns as compared to other tax-saving schemes (of course with risks attached).

Limitations of ELSS Funds: -

1.   Market Risks

ELSS funds invest in equity and equity-related instruments. Thus, there are risks associated with investing in ELSS funds. An investor cannot expect fixed and guaranteed returns like they do from other tax-saving instruments like fixed deposits, PPF, etc. It must be noted that the high risk-return ratio combined with lock-in period helps the investors to even out market fluctuations and is highly beneficial for long-term investors.

2.   Management Costs

ELSS mutual funds are managed by professional fund managers and thus one has to expect a certain fee that is liable to be paid for their expert management.

It is not a hidden fact that any investment in the equity market would generally attract high risks. Thus, ELSS funds are also subject to high risks. Also, there is no assurance of obtaining fixed returns as compared to other tax-saving schemes like fixed deposit or PPF.

To sum up, ELSS mutual funds can be very profitable and also help you save taxes. However, there are certain limitations to investment in ELSS mutual funds which investors must keep in mind. If you wish to invest in ELSS mutual funds online and wish to know about the general aspects of investing in ELSS, visit the mastertrust website now. Start the process immediately with mastertrust with a hassle-free and simplified platform.