Advantages & Disadvantages of ELSS Funds

What are the Advantages of ELSS Funds?

Here are some advantages of ELSS mutual funds:

• Gateway to equity: ELSS mutual funds invest up to 80% of its investible corpus in equity. Equity has a great potential to earn high returns on investment since it invests in shares of various companies.
• Shortest lock-in period: ELSS mutual funds have the shortest lock in period of 3 years among other tax saving options like Public Provident Fund (PPF), National Savings Certificate (NSC), etc.
• Convenience: One can invest in one-go with the help of lump sum option or invest in instalments with the SIP option. For investors who are monthly salaried paid employees, SIP can be the best option for them since they may not be able to invest in one-go and can conveniently invest in small amounts monthly.
• Affordability: With the SIP option, investors can invest amounts as little as ₹ 500/- so that it becomes lighter on the wallets.
• Higher returns potential: Since ELSS mutual funds majorly invest in equities, its return capability is superior to that of other tax saving options.
• Diversification: ELSS mutual funds invest in various equity mutual funds to avoid the huge risk exposure concentrated in less number of funds.
• Tax benefit: ELSS mutual funds under the Section 80C of the Income Tax (IT) Act, 1961, saves tax of up to ₹46,800/- by investing ₹1,50,000/-.
• Expert management: ELSS mutual funds are monitored by experts with an immense knowledge of mutual funds. These expert fund managers analyse the markets and alter stocks (whenever required) accordingly to leverage the market trends.

What are the Disadvantages of ELSS Funds?

• High risk ELSS Funds: ELSS mutual funds have a huge exposure to equity markets. Equity related instruments are highly susceptible to market volatility. Hence, due to this ELSS mutual funds carry high risk.
• ELSS Liquidity: ELSS mutual funds come with a lock-in period of 3 years. Investors who invest in ELSS funds should know that they cannot opt out of ELSS mutual funds before the end of the lock-in period.
• Not for risk-averse investors: Since ELSS mutual funds tap into equity markets, this tax saving option should be considered carefully by risk-averse investors as this investment poses high risk on investment.
• Limited benefits: Investors can only avail tax benefit of ₹1,50,000/- even if they invest surplus amount. That is, if an investor invests ₹12,00,000/- he will get tax benefit of ₹1,50,000/- only.
• Management cost: Since ELSS mutual funds are managed by professional fund managers, one has to expect a certain fee that is liable to pay for their expert management.
• Poor management: If the fund manager abuses his authority and churns the portfolio constantly, then it simply increases your expenditure on fees. This can lead you to gain suboptimal returns.