Are you looking for tax-saving options that can potentially generate inflation-beating returns over the long run? Equity-linked savings schemes, commonly known as ELSS mutual funds, maybe the answer.
ELSS funds combine the benefits of tax savings and wealth creation by investing primarily in equities and equity-related instruments. While you may be aware of the tax-saving advantages of ELSS, other lesser-known perks of ELSS could make a significant difference to your investment portfolio. However, before diving into the perks, let’s understand what ELSS funds are.
ELSS is a variant of equity mutual funds designed to help you as an investor save tax under Section 80 C. This tax-saving mutual fund invests your investible majorly in equities and equity-linked instruments to offer potential capital appreciation over the long run.
The fund comes with a mandatory lock-in period of three years, which allows you as an investor to remain committed to your investments in alignment with your tax-saving goals.
While ELSS mutual fund investments offer tax benefits under Section 80C, there is a lesser-known advantage. The long-term capital gains from ELSS funds are tax-free. Unlike other tax-saving options such as fixed deposits where interest earned is taxable, ELSS funds provide tax-free returns of up to Rs 1 lakh if investments are held for the long term, enhancing the overall effective yield on your investment.
ELSS funds predominantly invest in equities, providing an opportunity for potentially higher returns compared to traditional tax-saving instruments. Equities have historically offered inflation-beating returns over the long term, allowing you to grow your wealth in a tax-efficient manner. Utilising an online mutual fund calculator can give you a glimpse of the potential returns you could achieve with ELSS over time.
Many ELSS funds offer the option of investing through systematic investment plans (SIPs), allowing you to invest a fixed amount regularly. This feature helps in disciplined investing and leveraging the power of compounding over the long term. Additionally, some ELSS fund schemes offer a unique feature that allows you to invest even post the completion of the initial lock-in period, providing a level of liquidity not typically found in other tax-saving instruments.
ELSS funds are managed by professional fund managers who have expertise in equity markets. These fund managers carefully select and manage a diversified portfolio of stocks, mitigating risks and aiming for optimal returns. The diversification throughout distinct sectors and industries helps spread risk and potentially enhances returns.
While the mandatory three-year lock-in might appear like a drawback, it instils discipline in your investment approach. It prevents impulsive decisions and encourages a long-term investment perspective in alignment with the equity market’s natural cycles. This further helps in optimising your potential returns.
Equity-linked savings schemes (ELSS) are a prudent tax-saving investment product with the shortest lock-in of just three years than other tax-saving instruments. Additionally, this product comes with certain lesser-known benefits. By considering them, you can make an informed decision and potentially enhance your tax-saving and wealth-creation efforts.
In the case of any confusion, always remember to consult a certified financial advisor and use an online mutual fund calculator to compute the investible fund that you must put into the chosen ELSS to attain your financial goal’s corpus within the deadline.