What are pros and cons of investing in equity-linked savings schemes?

 Of all types of investments deductible under Section 80C, ELSS tends to be one of the most popular and efficient tax-saving instruments. Here is all that you need to know about ELSS funds

An Equity Linked Savings Scheme or ELSS is a type of equity diversified fund which invests a majority of its assets in equity shares of companies.

What is ELSS? A tax-saving investment deductible under Section 80C of the Income Tax Act

So, the next obvious question is: How does an ELSS fund work?

Well, the fund manager maintains a well-diversified portfolio by allocating resources across sectors, market capitalization, and industries. The Net Asset Value, or the intrinsic value of one unit of the fund, fluctuates with ups and downs of the underlying benchmark and overall economic factors.
The investment mechanism of ELSS is such that fund return tends to get affected by the overall movement in the equity markets. The objective is to keep the portfolio returns in line with expectations, and not to let it be affected by extreme price movements in one of the industry segments. However, the fund attempts to generate enough returns which results in capital appreciation and tax benefits over the long term.

Now let's talk about the key features.

ELSS fund: Key features
Tax deduction of up to Rs 1,50,000 a year
Lock-in period of three years
No provisions of premature exit

Unlike other funds, ELSS comes with a lock-in period of 3 years from the date of investment. It means that if you initiate a Systematic Investment Plan or SIP in an ELSS fund today, it will not be available for redemption before 3 years from now. You may exit, redeem or reinvest your units of ELSS funds only after the expiry of the 3-year period. Just like any other equity fund, ELSS funds are available in both dividend and growth options.
ELSS fund: Tax implication
LTCG up to Rs 1 lakh is tax-free
LTCG over and above Rs 1 lakh is taxable at 10%
Investment up to Rs 1.5 lakh can be claimed as a deduction

From a tax standpoint, up to Rs 1 lakh of long-term capital gains (LTCG) from an ELSS scheme is tax-free. LTCG over and above Rs 1 lakh is taxable at the rate of 10%. Under Section 80C of the Income Tax Act, your investment up to Rs 1.5 lakh can be claimed as a deduction from your gross total income in a financial year.
Now, let's talk about the risk factors.