2022 has been a peculiar year. We are still seeing the effects of the pandemic, but we are no longer confined to our houses. And even with limited restrictions, we are trying to stay safe and healthy more than ever before. But how does the pandemic changed our investing habits? If anything, people are more aware of the need to save money, primarily through investments. But where do you invest? There are multiple options for you to choose from, according to your preferences. For example, an equity-linked savings scheme or ELSS is such an option. Let us learn more about ELSS and see if it is still a valid investment option in 2022.
What are equity-linked savings schemes?
ELSS is a savings scheme that primarily focuses on the capital appreciation and tax-saving. It is similar to other mutual funds in terms of how it functions, but it focuses its investments on shares of different companies. Here, an ELSS fund can have up to 80% of its portfolio filled with equity-related investments, making it extremely aggressive. Let us take a look at some of the top advantages of ELSS and figure out if the same is a beneficial option in 2022.
The most significant advantage of investing in ELSS is its tax-saving capability. ELSS mutual funds come under section 80C of the income tax act of India. That means you can save up to Rs.1.5 lakh in income tax. Hence, You can save a maximum of Rs 46,800 yearly in taxes.
Most investment options that come under 80C have more extended lock-in periods of at least five years and a comparatively lesser return potential. ELSS mutual funds are an exception here. It is the only market-linked savings scheme that comes under section 80C, with which you can save tax and, at the same time, aggressively appreciate your capital.
Lower lock-in period
As we have discussed above, most tax-saving investment schemes have a more extended lock-in period that can range anywhere from five years to some decades. A perfect example of this is tax-saving fixed deposits. If you withdraw your fund prematurely from a tax-saving mutual fund, you may attract penal charges. Also, you may be liable to repay all the tax reliefs you have gotten to date. Here, ELSS is a relief as it comes with just three years lock-in period. But there is one slight downside to it as well. When you are invested in FD, you have the option to withdraw before the lock-in period, paying penal charges and letting go of your benefits, but with ELSS, you cannot withdraw until the lock-in period is over.
As we have discussed above, most tax-saving investment options have lower return potential comparatively. The main reason for this is that most of these options are not market-linked. If you take the history till now, market-linked investment options tend to give you better returns than interest-based investment options most of the time. Since ELSS focuses on equity funds investments, they tend to give higher returns than mutual funds with other focuses too.
Is ELSS a valid option in 2022?
To understand that, you have to gauge two things first – your investment goals and risk appetite. ELSS investment work best when you stay invested for a longer time. Hence, if your goals are short-term, another investment option might suit you better.
Also, since ELSS invests in equities, they are highly aggressive and risky. Hence, it will suit you better if your risk appetite is high.
ELSS options work best if invested according to your investment taste. Talk to an investment advisor to make sure ELSS is a perfect fit for you.