Generally, people opt to carry out mutual fund investments with just one aim. The said aim is to acquire wealth over time. But some mutual fund schemes can be used for more than saving money and accumulating wealth for the future. Look at an ELSS mutual fund or equity-linked savings scheme as an example. These funds are helpful for both accumulating wealth and saving on taxes.
What is ELSS?
This variant of mutual fund invests in stocks or equities that come with a lock-in period of three years. These funds can save tax under Section 80C of the Indian Income Tax Act, 1961. Hence through this tax-saving mutual fund, you can claim deductions on taxable income of up to ₹1.5 lakhs annually. They offer the benefits such as tax-saving advantages and possible capital gains through equity investments.
This variant of mutual funds invests approximately 80% in equities. The rest 20% is allocated to debt instruments. Fund managers of ELSS invest in a wide range of stocks of companies that are listed. Before investing, the manager selects stocks of companies with a wide range of market capitalisation like small-, mid-, or large-cap funds. Apart from investing in companies of different capitalisation, the fund manager also invests in the stocks of companies of other relevant industry sectors. ELSS mutual fund allocations are carried out in specific proportions and depend on the fund’s objective.
Why invest in ELSSfunds?
Now that you know what ELSS is, let us look at the different reasons for you to consider an equity-linked savings scheme as an investment option:
- Tax advantages:
ELSS funds come with the best tax benefits of all the tax-saving mutual fund investment options under Section 80C. With the help of these funds, you can claim a deduction of up to ₹1.5 lakhs annually. The tax-saving advantages of this type of mutual fund can help you reduce your tax liability and save more.
- Professional management:
You don’t need to manage your mutual fund portfolio. Instead, the fund manager is responsible for taking care of your portfolio. A fund manager carefully selects the underlying assets for investments. You also don’t need to track your portfolio or rebalance it when required. An experienced fund manager with an excellent track record can help you acquire wealth over time. Simply put, ELSS funds offer more than just tax benefits.
- Higher returns:
ELSS, as its name suggests, allocates funds to equities. But investing in equities comes with risks. However, because of their volatility, equities have the potential to generate high returns in the future. You could take care of volatility and accumulate wealth over time by opting for SIP and staying invested for the long term.
- Lowest lock-in period for tax saving option:
An equity-linked savings scheme has a lock-in for three years. Three years is considered the shortest, unlike other tax saving options under section 80C like FD, NSC, EPF and VPF, and PPF.
ELSS is an investment option with dual benefits, saving taxes and accumulating long-term wealth. But before signing up for an ELSS, check factors such as past performance of the fund, expense ratio, and risk profile. Choose ELSS if you have a long-term goal and diversify your investments to make the most of this fund. Contact a qualified financial advisor to choose the best ELSS mutual fund that aligns with your risk tolerance and financial goals. Start early and invest wisely.