Definition: The Equity Linked Saving Scheme or ELSS is another diversified equity mutual fund which invests the majority of funds in equity and enjoys the benefit of tax exemption under the section 80 C of the Income Tax Act.
The Equity Linked Saving Scheme is the mutual fund that has the lock-in period of three years from the date of investment. This means that if the systematic investment plan or SIP starts then each of the investment gets locked for three years and the investor cannot withdraw anything before the maturity of the mutual fund i.e. three years.
As compared to the other tax saving schemes such as NSC (National Savings Certificate), PPF (Public Provident Fund), etc. the lock-in period of ELSS is much lower. Since the ELSS is an investment in the equity markets and by investing these for a long term can give better returns over the other asset classes.
Like other equity funds, the ELSS also enjoys both the dividend and growth options. Under the growth option scheme the investor gets the lump sum amount on the expiry of the three years, while in the dividend option scheme, the investor gets the regular dividend income every time the fund declares it, even during the lock-in period.
The investor must cautiously select the equity linked saving scheme; he must do research to study the long-term performance of the ELSS and must look at the fund details such as expense ratio of the fund, the volatility of fund in the past, the fund’s manager investment approach, fund’s portfolio, etc. These funds are not meant for the risk-averse investors, i.e. investors not willing to take a risk.