There is an old proverb that says that you can’t have the cake and eat it too. But, in some cases, you can. In the case of investing in ELSS mutual funds, one can grow their wealth and save taxes at the same time. Therefore, one can enjoy dual benefits the help of one investment, i.e. ELSS.
Let us get to know more about tax saving mutual funds for a better understanding of them.
What is an ELSS fund?
ELSS are mutual fund investments that help investors save income tax. Under the Section 80C of The Income Tax Act, one can claim deduction of upto Rs 150,000 from their taxable income in a financial year by investing in schemes like PPF, bank tax saver FD, NSC, life insurance premium and of course ELSS mutual funds. This is why ELSS are also called as tax saving mutual funds.
ELSS mutual funds are diversified equity funds which invests minimum 65% of the scheme portfolio in equity and equity related instruments. They may also have some exposure to fixed-income securities as well.
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Features of ELSS mutual funds
Given below are the main features of ELSS –
- ELSS mutual fund schemes offer tax-saving investment option with the potential to offer inflation-beating returns.
- An investor is able to enjoy dual advantages of capital appreciation from equity investments, along with tax savings.
- ELSS funds have a compulsory lock-in period of 3 years, which is the shortest one as compared to other tax saving instruments in the market such as PPF, NPS, etc.
- An investor can choose to invest any amount in ELSS as there is no upper limit.
- The investor can choose for dividend pay outs also in case he/she wants regular income. But investors should note that dividends earned are taxable. Growth option is a preferred option as the gains are treated as long term capital gains. Long term capital gains are tax free upto Rs 1 Lakh in a financial year and beyond that it is taxed at 10% rate.
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Things to consider before investing in ELSS
If you are an investor looking to make an investment in ELSS mutual funds, here are some factors to consider before making the decision:
- Investment horizon – It is advisable to have a long investment horizon, ideally 5 years or more, for any equity mutual fund investment. This is done in order to mitigate market volatility.
- Lock-in period – Investments are locked in mandatorily for three years, therefore, one cannot withdraw their holdings before this period. Hence, as an investor, you must have the patience to remain invested for the long term.
- Risk capacity – One needs to have medium to high risk capacity for investment in ELSS mutual funds. This is because ELSS funds primarily invest in equity and equity-related instruments. And, equity is associated with high risk which also means potential high returns.
- Returns – Tax saving mutual funds do not give guaranteed returns as they are dependent entirely on the performance of the underlying securities which are traded in the stock market. Hence, one needs to be patient over the long period of time, in order to get good results out of these mutual funds.
ELSS mutual funds are an attractive option for investors who want to diversify their portfolio and enjoy benefits of both tax saving as well as wealth creation.