Nobody likes the extra income that is shelled out from their pockets. Tax, though necessary, often acts as a deterrent among investors to invest in different types of investment. Wouldn’t it be great if there was a mutual fund that allows you to grow your wealth plus save tax. Well, there is. Enter ELSS mutual funds. This article will serve as an ELSS investment guide for investors on the lookout for best tax-saving mutual funds.
What is ELSS?
Equity-Linked Savings Scheme, commonly known as ELSS funds are tax-saving mutual funds that invest a majority of their corpus, at least 80% of their assets in equity and equity-related securities. As per Section 80C of the Income Tax Act, 1961, ELSS tax saving mutual funds are eligible for a tax deduction of up to Rs 1.5 lac. As an investor, you can save up to Rs 46,800 each year, provided that you fall in the highest tax bracket. ELSS funds have a lock-in period of just three years.
Why should an investor invest in ELSS funds?
Following are some of the reasons why you might consider investing in ELSS mutual funds:
- Lowest lock-in period
ELSS funds have a lock-in tenure of mere 3 years as opposed to other tax-saving investments such as Public Provident Fund (PPF) and Fixed Deposits (FD) that have a lock-in tenure of 15 years and 5 years respectively. Thus, ELSS tax saving funds enjoy the lowest lock-in period among tax-saving investments. - Dual benefits
As an investor can save tax by investing in ELSS mutual funds, they offer investors with dual benefits of tax-saving benefits and the potential to create wealth. - Ease of investment
Just like any other mutual funds, you can invest in ELSS via a lumpsum mode or a SIP (Systematic Investment Plan) mode. You can choose any method and invest in ELSS. - Transparency
Just like any other type of mutual fund, ELSS funds are regulated by the Indian mutual funds’ regulator – SEBI (Securities and Exchange Board of India). Thus, they are highly transparent. Further, SEBI has mandated all AMCs (Asset Management Company) to regularly disclose the key performance of these ELSS mutual funds. - Potential to generate higher returns
As ELSS mutual funds invest chiefly in equity and equity-related securities, the returns on ELSS funds are significantly higher than any other tax-saving investments. While alternate tax saving investments offer average returns around 6 to 8% annually, ELSS funds have the potential to offer an average return of a whopping 12 to 14%, provided that you invest for a longer duration.
Though ELSS mutual funds have a lock-in period of just three years and you can withdraw your funds after that, experts suggest staying invested for a minimum of eight to ten years. This is because ELSS funds realise their true potential when invested for a long duration. Happy investing!