Your investments play a huge role in determining whether you have a secured future.If you have not started investing already, it is high time you invest in mutual funds. Come what may, you should never let your investments suffer.
There are several investments available today that not only help you create wealth but also help save tax. One such widely popular investment option is the tax-saving mutual fund termedequity-linked saving scheme(ELSS). Let’s understand this mutual fund investment in detail.
What is ELSS?
ELSS funds are mutual fund schemes that predominantly invest in stocks or equity. Suchmutual funds have a mandate to invest at least 80% of their corpus in equities and related instruments. ELSS funds can be open-ended or close-ended schemes. Individuals can claim a tax benefit for investments up to Rs1.5 lakhmade in ELSS funds under Section 80C of the Income Tax Act,1961. This way, an individual can save up to Rs46,800 in taxes each financial year when they invest in ELSS funds. These equity funds come with a lock-in period of 3 years, after which, individuals can withdraw their investment. However, mutual fund experts advise their clients to hold on for more than 3 years to avail the full benefits of the power of compounding and rupee cost averaging.
Why is ELSS better than other 80C investments?
Of all the types of mutual funds, ELSS funds are the only mutual fund investments that offer taxexemption benefits to investors under Section 80C. These equity-linked instruments have the potential to yield higher returns and are an ideal choice for several long-term investors. ELSS holds its groundbecauseof the higher post-tax returns it offers compared to other Section 80C investments such as ULIPs (Unit-Linked Insurance Plans) and Public Provident Fund (PPFs).
Following are some of the reasons that make ELSS an ideal investment avenue for most investors, especially new ones.
1 Shorter lock-in period
Unlike other investment options like Public Provident Fund, National Savings Certificate (NSC), and Employees’ Provident Fund (EPF), all of which have lock-in periodsequal to or over 5 years, ELSS funds come with arelatively shorter lock-in period at 3 years.
2 Higher Return on Investment (RoI)
Since ELSS funds investthemajority of their corpus in equity and related instruments, the returns on these mutual funds are higher than most investment options that offer taxbenefits in the long run. This gives you dual benefits in the form of capital appreciation and tax-saving.
3 Flexibility with ELSS funds
If you are unhappy with a ULIP investment, you can only shift and invest in mutual funds offered by that particular ULIP. However, if you are not satisfied with your ELSS fund, you can move to another fund as you are not obligated to commit to a multi-year deal.
4 Safeguards investment from market volatility
These funds act as a strong shield against volatility associated with investing in mutual funds. ELSS schemes not only fair from market highs but they also have provisions to mitigate the impact of market lows.
5 Inculcates financial discipline
Investing in mutual funds inculcates financial discipline in individuals as you have to continue with your SIPs without fail and also not be able to touch the fund during its lock-in period.
Though ELSS schemes come with a lock-in period of 3 years, experts still recommend holdingthe fund(s) for a longer investment duration. Individuals are often advised to link their ELSS funds with their long-term financial goals and objectives so that they are not tempted to withdraw their investments after 3 years or as soon as the market takes a hit.
These are some of the benefits of investing in an ELSS fund. Over the long term, the benefits of rupee cost averaging and the power of compounding aid in sustainable wealth creation. More importantly, they are ideal instruments to fulfil long-term financial goals. Hence, ELSS funds are ideal for long-term investors and it is recommended that you start investing in one now. Happy investing!