7 Myths About ELSS in Mutual Funds Dispelled

7 Myths About ELSS in Mutual Funds Dispelled

ELSS, also known as Equity Linked Savings Scheme, is a type of mutual fund that offers several benefits. In addition to giving you the chance to create wealth in the long-term, ELSS investments are also eligible for tax benefits to the tune of Rs. 1.5 lakhs in a financial year under section 80C of the Income Tax Act, 1961. Although investing in ELSS mutual funds is risky, the returns that you get from it are usually higher than many other traditional investment options. 

That said, despite so many advantages, many individuals don’t choose to invest in them. One of the main reasons for this has to do with the several myths surrounding this investment option. In this article, we’re going to take a look at 7 myths surrounding ELSS and debunk them. Let’s begin. 

Myth 1: ELSS investments are automatically redeemed after the lock-in period 

ELSS mutual funds have a lock-in period of 3 years, during which you cannot withdraw your investment. However, this has led many to believe that upon the expiry of the 3-year lock-in period, their investments would be redeemed automatically. This is, however, not true. Once the 3-year lock-in period expires, you can choose to continue to stay invested for however long you desire. 

Myth 2: You can only invest up to Rs. 1.5 lakhs per year in ELSS mutual funds 

This is another major myth surrounding ELSS. Although the tax benefits that you can claim under section 80C of the Income Tax Act, 1961 is restricted to Rs. 1.5 lakhs per financial year, there’s no limit on the total amount of investment that you can make in the fund. For instance, you can choose to invest even Rs. 3 lakhs in an ELSS, however, you would only be able to claim a maximum of Rs. 1.5 lakhs under section 80C. 

Myth 3: Only a lump sum investment in ELSS qualifies for tax benefits 

To be able to claim the tax benefit of Rs. 1.5 lakhs in a financial year under ELSS, you don’t have to make the entire amount as a lump sum investment. On the other hand, you can also choose to start an SIP and invest small amounts each month. You will still be allowed to claim the tax benefits. 

Myth 4: ELSS investments are ideal for the short-term 

Due to the 3-year lock-in period, many individuals think that ELSS investments are ideal only for that duration. However, that’s simply not true. ELSS mutual funds work best when you stay invested for a long period of time, say, 5 years or more. 

Myth 5: ELSS mutual funds are all the same 

Just like how there are multiple types of equity mutual funds, the same is the case with ELSS as well. You can find various kinds of ELSS mutual funds ranging from large-cap and mid-cap funds to small-cap and multi-cap funds.

Myth 6: The returns you get from ELSS mutual funds are tax-free 

This myth is partially true. The returns that you get from ELSS are tax-free only up to Rs. 1 lakh in a financial year. If the returns during any year exceed that amount, you will be liable to pay Long-Term Capital Gains (LTCG) Tax at the rate of 10% on the amount that exceeds Rs. 1 lakh. 

Myth 7: ELSS funds with low NAVs are ideal for investment 

When browsing through ELSS mutual funds, you may see some with low NAVs. While you may be able to purchase more units by investing in such funds, it doesn’t necessarily mean that they’re better for investment than other funds with higher NAVs. In fact, when investing in an ELSS, the past performance of the fund matters more than its NAV. 

Conclusion

Now that the most important myths surrounding ELSS have been broken, go ahead and invest in one today. On the other hand, if you’re looking for other ways to invest in the stock market, you can also consider investing in an upcoming IPO

That said, before you proceed, make sure to open a demat account in your name. You can visit Motilal Oswal to open one if you don’t have an account. It takes only a few minutes and can be done online from the comfort of your own home.

 

Related Blogs: 5 reasons for the sharp growth in SIPs in India | Tax implications on a Mutual Fund and SIPs | SIP and the power of compounding | If you're investing in SIP, make Mutual Funds SIP calculator your best friend

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