ELSS Funds: Invest in Mutual Funds for Tax Savings and Wealth Growth

Last Updated : May 26, 2023, 4:37 p.m.

ELSS mutual fund can be a great way to invest your hard-earned money while saving on taxes. ELSS funds help you grow your wealth while also enjoying tax benefits. ELSS is a short form for Equity Linked Savings Scheme, and as the name suggests, ELSS mutual funds generally invest in equity shares of companies to generate long-term wealth.

ELSS mutual fund can be a great way to invest your hard-earned money while saving on taxes. ELSS funds help you grow your wealth while also enjoying tax benefits. ELSS is a short form for Equity Linked Savings Scheme, and as the name suggests, ELSS mutual funds generally invest in equity shares of companies to generate long-term wealth.

What are ELSS Funds?

For investors wishing to reduce their tax burden while potentially increasing earnings, ELSS mutual funds, also known as Equity Linked Savings Scheme mutual funds, are a great choice.

ELSS funds provide tax exemptions under Section 80C of the Income Tax Act as one of their main benefits. This implies that investing in ELSS mutual fund qualifies you for tax benefits of up to Rs. 1.5 lakh. Additionally, since ELSS mutual funds invest in stocks, which historically have produced higher returns than other asset classes over the long term, they have the potential for long-term growth.

What are the Features of ELSS Funds?

Equity-Linked Savings Schemes, often known as ELSS mutual fund, is a class of mutual funds that appeal to investors seeking long-term growth and tax advantages. ELSS funds have the following significant characteristics:

• As high-risk, high-reward investment choices, ELSS mutual fund invests a minimum of 80% of the total investible corpus in equities and equity-related products.
• You can’t withdraw your investment from ELSS mutual fund before the conclusion of the three-year lock-in term. This can stop investors from acting rashly and help them build a disciplined investing strategy.
• Investing in ELSS funds offers tax exemption on up to 1.5 lahks. This makes the ELSS mutual fund attractive for investors looking to save taxes.

ELSS mutual fund is a high-risk, high-reward investment choice that could help you build long-term wealth and reduce taxes.

Tax Benefits Offered by ELSS Mutual Funds

Numerous tax advantages make investing in an ELSS mutual fund a desirable investment choice for many taxpayers. The following are some of the  advantages provided by ELSS Funds:

• Investment Tax Deduction : Under Section 80C of the Income Tax Act, an ELSS mutual fund provides benefits for investment tax deductions. Along with other eligible instruments like PPF, NSC, and more, you can claim a tax deduction of up to Rs. 1.5 lakh on the principal amount invested in ELSS funds.
• Tax-free Returns : Long-term capital gains (LTCG) taxation is applied to the profits received on ELSS mutual fund. A financial year’s worth of LTCG up to Rs. 1 lakh is tax-free. If your LTCG from ELSS funds is less than Rs. 1 lakh, you are exempt from paying taxes on it. A 10% flat tax without indexation is applied to any LTCG over Rs. 1 lakh.
• Lock-in Period : An ELSS mutual fund has a compulsory lock-in period of three years. It means that you cannot withdraw your investment before the end of this period. This lock-in period ensures that investors stay invested for the long term.

In general, ELSS mutual fund is a fantastic investment choice for anybody wishing to reduce their tax burden while possibly earning substantial profits over the long run. Before you start investing, it’s crucial to consider the lock-in period and the tax ramifications. Always seek the financial advice of a professional to determine your investment objectives and risk appetite.

What are the advantages of ELSS Mutual Funds?

ELSS mutual fund is a desirable investment choice since they provide a variety of advantages to investors. Here are several justifications for thinking about investing in ELSS mutual fund:

• Diversification : Across a range of market capitalisations, industries, and themes, ELSS mutual funds invest in stock and equity-related securities. This makes it possible to diversify, which can aid in lowering total risk.
• SIP investment option : ELSS mutual fund offers the option of investing through SIPs or systematic investment plans. This allows investors to invest small amounts regularly, accumulating to a significant sum over time.
• Long-term investment : ELSS funds encourage a long-term investing strategy with a three-year lock-in requirement. Due to their ability to invest over a longer time, investors may see more returns.

How to Invest in ELSS Mutual Funds?

You must consider several things when investing in an ELSS mutual fund to make a wise choice. Here are some crucial considerations:

• Identify your investment and tax planning needs and goals before investing in ELSS funds. Tax savings should not be your only motive for investing in an ELSS mutual fund. Ensure you have a comprehensive investment plan aligning with your financial goals.
• Decide whether to invest through a lump sum or a systematic investment plan (SIP). Investing through a SIP can help you average your buying cost per unit and manage market volatility better.
• Diversification is key. Ensure that the fund portfolio is well-diversified across different sectors, market capitalisations, and themes to manage the risk associated with equity investments.
• Think about the fund’s asset size and liquidity. Large asset sizes and strong liquidity guarantee that the fund is well-managed and that you can swiftly quit the ELSS mutual fund in an emergency.

By considering these factors and conducting proper research, you can take an informed decision about investing in ELSS mutual fund that aligns with your investment and tax planning goals.

Conclusion

To sum up, ELSS mutual fund may be a fantastic choice for individuals seeking a tax-saving investment that informs them about the stock market. It’s crucial to remember that buying ELSS funds shouldn’t be done purely for tax planning reasons. Before investing, a person should develop a thorough investment strategy that fits their financial objectives and risk tolerance.

When investing in an ELSS mutual fund, investors should consider whether to go for a lump sum investment or a SIP. While the lump-sum investment may seem tempting due to its tax-saving benefits, it can be risky if done at a time when the market is high. Starting a SIP can help average out the cost per unit.

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