Last Updated on August 1, 2022 by rabiamuzaffar
Imagine an investment product which can offer market-linked returns on your investment and at the same time lower your tax obligations too, wouldn’t it be ideal?. Fortunately, such an investment option actually exists because of a special investment product called the Equity Linked Saving Scheme Mutual Fund, or ELSS Mutual Funds.
How Do ELSS Funds Work?
Open-ended equity mutual fund known as an Equity Linked Savings Scheme (ELSS) invests largely in stocks and other securities that have an equity component. According to Section 80C of the Income Tax Act of 1961, they fall under a particular category of mutual funds that are eligible for tax deductions. They are therefore frequently referred to as mutual funds that save on taxes.
What Are The Advantages Of Investing In ELSS Mutual Funds?
Mutual funds that offer ELSS offer the chance to reduce taxes while generating respectable profits. At least 80% of the corpus of ELSS Mutual Funds are invested by these funds in equity stocks. As a result, their potential returns are directly correlated with the performance of the stock market. If you want to invest for long-term objectives like building a retirement corpus or purchasing a new home, investing in ELSS Mutual Funds can potentially be a good option to save tax.
An annual tax deduction of up to Rs. 1.5 lakh is available on investments in ELSS Mutual Funds. A three-year lock-in term is also required for these funds. Though it has one of the shortest lock-in periods of all the tax-saving investing options available under Section 80C. ELSS funds are a well-liked investment choice among investors as a result of all these advantages.
SIP or Lumpsum?
Investing with a long-term perspective is the best way to optimise returns on mutual funds. Decide on your investment objectives at the start of the year and start making optimal investments using systematic investment plans (SIPs). Consistent year-round investing can help you lessen your exposure to market volatility and accumulate wealth over time.
What Are The Characteristics of Equity Linked Savings Scheme Mutual Funds?
Important Attributes Of ELSS Mutual Funds
Shortest Lock-In Period
Long lock-in periods are a feature of popular tax-saving products like the Public Provident Fund (PPF) and tax-saving Fixed Deposits (FDs). For instance, the lock-in time for PPF is 15 years, whereas the lock-in period for tax-saving FDs is 5 years. ELSS funds, in contrast, have a lock-in term that is only three years long.
Returns That Can Beat Inflation
The majority of the ELSS Mutual Funds have provided returns that have beaten the inflation rate. However, please note that past returns are not a guarantee for future returns. Please read the offer document before investing in ELSS Mutual Funds.
Under Section 80C, you can reduce your taxable income on investments up to Rs. 1.5 lakh each year if you choose to invest in ELSS Mutual Funds. In case you choose to sell your ELSS Mutual Funds units you will be liable to pay long-term capital gains tax (LTCG Tax) on the gains you make. LTCG Tax is exempt for long-term capital gains (LTCG) up to INR 1 lakh. Beyond that, you will be liable to pay tax at the rate of 10%.
What Are The Risk Involved?
Market risks can affect investments in mutual funds of any kind. This is especially true for stocks. Since ELSS Mutual Funds invest primarily in stocks, the likelihood that the fund may perform poorly when the markets are unfavorable is significant. Additionally, ELSS is subject to all risks related to equity mutual funds.
Furthermore, the three-year lock-in term can be too long for certain investors. Before selecting any fund, you should ideally evaluate the investment style of the fund against your risk tolerance.
ELSS is unsuitable for you if you are wary of the dangers involved with the stock market or don’t want to keep your money invested for three years without any returns.
Did you know? You can now invest in ELSS Mutual Funds on Kuvera:
Step 1: Download the Kuvera trading app or visit our website.
Step 2: Create your account on Kuvera by completing the mandatory KYC procedure. This will hardly take a few minutes. Once that’s completed, select the ‘Invest’ option on our homepage after which you can select ‘Mutual Funds’ and ‘ELSS’.
Step 3: Kindly go through the list of all zero-commission direct plans of ELSS Mutual Fund schemes to start investing.