Investing in Equity Linked Saving Schemes
While many people have heard the term equity, few are aware of what the terms means.
In order to understand it, we must first understand how companies function.
As you know many companies are known as public held or publicly limited companies.
A company becomes public limited when, in order to generate more funds, it begins to sell ownership stock in the form of equity shares in the market.
Purchasing of these shares, allows an investor the right to claim dividends from the profits that the company makes.
A number of mutual funds invest in purchasing these equity shares as a means to provide returns for their investors.
Investing in equity stock is not as safe as investing in other long-term securities but the returns are much higher.
In order to lower the risk generated by investing in shares, most mutual funds diversify their investments over a number of companies in various industries.
This diversity ensures that unless there is a massive over-all market collapse, some shares will definitely be generating income, even if others fail.
Equity-Linked Saving Schemes or ELSS is a type of diversified equity mutual fund that we have discussed above.
It is a mutual fund that comes with certain terms and conditions such as a lock in period and income tax benefits.
These funds obviously invest a majority of their capital in equity and related products.
There are the main options when making an investment in a mutual fund ELSS.
The first is the growth option where income is earned by the fund but then not distributed to individual investors.
The returns are only realised when the investor sells his funds and are considered long-term capital gains.
The second is the dividend option, where the fund will distribute the income earned by the investment as dividends to investment holders.
The final option is the dividend reinvestment options.
Here the dividends realised by the fun are then re-invested.
A major advantage of investing in ELSS is that there is no ceiling for the investments but the investments do qualify for tax deductions.
According to SEC 80C under the income tax act, any investment up to a maximum of rupees one-lakh in a financial year can be tax deductible.
Also, dividends or long term capital gain realised by the investment is tax-free.
However, these funds come with a lock-in period of 3 years, which is not a condition on other mutual funds.
Finally when considering how to invest in mutual funds with ELSS or which funds will yield the highest returns be sure to check the funds AUM (Asset Under Management), past performance and Sharpe ratio.
These will give you an idea as to how well the fund may perform for you.
In order to understand it, we must first understand how companies function.
As you know many companies are known as public held or publicly limited companies.
A company becomes public limited when, in order to generate more funds, it begins to sell ownership stock in the form of equity shares in the market.
Purchasing of these shares, allows an investor the right to claim dividends from the profits that the company makes.
A number of mutual funds invest in purchasing these equity shares as a means to provide returns for their investors.
Investing in equity stock is not as safe as investing in other long-term securities but the returns are much higher.
In order to lower the risk generated by investing in shares, most mutual funds diversify their investments over a number of companies in various industries.
This diversity ensures that unless there is a massive over-all market collapse, some shares will definitely be generating income, even if others fail.
Equity-Linked Saving Schemes or ELSS is a type of diversified equity mutual fund that we have discussed above.
It is a mutual fund that comes with certain terms and conditions such as a lock in period and income tax benefits.
These funds obviously invest a majority of their capital in equity and related products.
There are the main options when making an investment in a mutual fund ELSS.
The first is the growth option where income is earned by the fund but then not distributed to individual investors.
The returns are only realised when the investor sells his funds and are considered long-term capital gains.
The second is the dividend option, where the fund will distribute the income earned by the investment as dividends to investment holders.
The final option is the dividend reinvestment options.
Here the dividends realised by the fun are then re-invested.
A major advantage of investing in ELSS is that there is no ceiling for the investments but the investments do qualify for tax deductions.
According to SEC 80C under the income tax act, any investment up to a maximum of rupees one-lakh in a financial year can be tax deductible.
Also, dividends or long term capital gain realised by the investment is tax-free.
However, these funds come with a lock-in period of 3 years, which is not a condition on other mutual funds.
Finally when considering how to invest in mutual funds with ELSS or which funds will yield the highest returns be sure to check the funds AUM (Asset Under Management), past performance and Sharpe ratio.
These will give you an idea as to how well the fund may perform for you.
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