Equity-Linked Saving Schemes (ELSS) have quickly become one of the most sought-after tax-saving investments over recent years, providing not only an opportunity for wealth creation but also significant tax breaks under India’s Income Tax Act. If you’re seeking ways to save taxes while potentially growing wealth, consider Equity-Linked Saving Schemes as part of your strategy. This article will explore this investment tool and explain its many advantages, along with using mutual fund calculators to estimate potential returns for ELSS investments.
What is an ELSS fund?
An ELSS fund is a type of equity mutual fund that invests primarily in stocks. They feature a mandatory lock-in period of three years where investors cannot redeem their units prior to this point in time. ELSS funds’ primary draw lies in their tax-saving capabilities. Investments made using these mutual funds are eligible for deductions of up to Rs1.5 lakh in each fiscal year under Section 80C of the Income Tax Act.
Advantages of investing in ELSS funds
ELSS funds offer several advantages that make them a suitable investment choice for tax-saving and wealth creation:
- Tax benefits
As stated above, ELSS investments qualify for tax deductions under Section 80C and can help lower taxable income while cutting the taxes payable.
- Wealth creation
ELSS funds typically invest primarily in equities, which have historically generated higher returns than traditional tax-saving instruments like fixed deposits or Public Provident Funds (PPF) over time. Though volatile at times, equity investments offer better inflation-adjusted returns over longer timeframes.
- Short lock-in period
ELSS funds offer one of the shortest lock-in periods at three years compared to PPF (15-year lock-in) or National Savings Certificates (5-year lock-in). This makes them more liquid than alternatives such as PPF (15 years of investment lock-in) and National Savings Certificates (5-year lock-in).
ELSS funds provide investors with a diversified portfolio of equity stocks to reduce risks and potentially enhance returns, which can benefit those without extensive experience selecting stocks themselves. Diversification is especially helpful for novice investors with little knowledge or skills in-stock selection.
How can a mutual fund calculator estimate ELSS returns?
Mutual fund calculators, also referred to as investment or SIP calculators, are useful tools that can assist you with estimating potential returns from ELSS investments. By entering details such as investment amount, tenure and anticipated rate of return into this calculator, you can get an approximate future value estimation for your ELSS investment. Here’s how using one works for ELSS:
Enter your investment amount: Enter either a lump sum investment amount or monthly investment (SIP) plan amount that you wish to invest.
Determine your investment tenure: Enter the expected duration of your ELSS fund investment: As these products come with a three-year lock-in period, the minimum investment horizon should be three years.
Enter your expected rate of return: Simply input the annualized rate of return you anticipate from investing in an ELSS fund. While past returns can provide some guidance, they don’t guarantee future results.
Calculate estimated returns: To create an estimate of the future value of your ELSS investment, click the ‘Calculate’ button.
Do keep in mind, however, that mutual fund calculators provide only an estimate of potential returns, with actual results likely differing depending on market conditions and fund performance.
ELSS mutual funds are an effective tax-saving investment vehicle that may help you reduce taxes while building wealth in the long run. Understanding their advantages and using an ELSS fund calculator to estimate returnswill enable you to make informed decisions when adding these investments to your portfolio.