With a plethora of investment options available to an investor, it’s easy to feel overwhelmed. An investor should opt for the ideal investment avenue based on their investment horizon, financial objectives, and risk appetite. However, if tax saving is what you are looking to achieve while investing in mutual funds, you might consider investing in ELSS (Equity-Linked Savings Scheme). This article will focus on the benefits of ELSS mutual funds offered to an investor.
What is ELSS funds?
ELSS funds, also referred to as ELSS tax saving mutual funds invest at least of 80% of their corpus in equity and equity-linked securities. Additionally, Investments in ELSS mutual funds are eligible for a tax deduction of up to Rs 1.5 lac under Section 80C of the IT Act, 1961. As a result, an investor can save up to Rs 46,800 p.a. by investing in ELSS funds. Investors should note that ELSS tax saving funds are accompanied by a three year lock-in period, that also happens to be the shortest lock-in period among any other Section 80C investments. These tax saver mutual funds offer dual benefits of tax saving and potential wealth creation.
Benefits of investing in ELSS
ELSS funds hold an edge over other 80C investment avenues on several counts. Some of them are explained below:
- Shortest lock-in period
ELSS funds are accompanied with a lock-in period of three years. These tax saving mutual funds enjoy the lowest lock-in period against different 80C investments such as PPF (public provident fund), NSC (national savings certificate), etc.
- Potentially higher returns
Usually, tax-saving 80C investments provide single-digit returns on an average to investors. It could be anywhere between 6 to 8% returns p.a. However, ELSS funds have the potential to produce substantially higher returns. The average returns offered by ELSS funds are around 12-14% when invested for a longer duration.
- Better post-tax returns
Long-term capital gains, also known as LTCG is exempted up to Rs1 lac on ELSS investments. LTCG above Rs1 lakh is taxed at mere 10%. Thus ELSS funds offer better post-tax returns than any other tax-saving investments.
- High levels of transparency
Just like any other type of mutual funds, ELSS funds are also managed by fund houses or AMCs (asset management company). As per Securities and Exchange Board of India (SEBI), AMCs are mandated to make periodic and regular disclosures about key info about different schemes managed by them. Until now, no tax-saving investment option exhibits a higher degree of transparency than ELSS funds.
- Diversification and ability to switch funds
ELSS funds offer the much needed diversification across various companies and sectors . An investor can further diversify their investments across varying investment styles and fund houses. As an investor also has the liberty to stop their underperforming ELSS investments at any time and switch to better performing funds.
Most experts will agree that among the different tax-saving options offered to an indivdual, ELSS provdies an excellent combination of shorter lock-in periods, significant market-linked returns and greater flexibility, making them quite popular among investors. So what are you waiting for? Begin your journey in ELSS funds today and reap the benefits. Happy investing!