There are different types of mutual fund schemes available on the market to assist investors in meeting their financial goals. An investor can choose to invest in debt mutual funds, equity, or hybrid funds. But why should you invest in equities when debt funds provide stable returns? This is because equity funds generate maximum returns. And if you are searching for a mutual fund that can save you money on taxes, ELSS Funds are the way to go.
What is ELSS Fund?
An investor’s primary goal is to choose investments that allow them to build wealth while incurring the least amount of tax burden. Though there are different types of investing alternatives available, most of them offer returns that are taxable. This is where tax saving mutual fund scheme ELSS comes in.
The only type of mutual fund eligible for tax deductions under Section 80C of the Income Tax Act of 1961 is an equity-linked savings plan, often known as an ELSS fund. By investing in ELSS mutual funds, you may claim a tax rebate of up to Rs.1,50,000 and save up to Rs.46,800 in taxes every year.
The asset allocation of ELSS mutual funds is mostly made up of equities and equity-linked assets such as listed shares (approximately 65 per cent of the portfolio). They may also have some exposure to fixed-income securities. These funds have a three-year lock-in term, which is the shortest of any Section 80C investment.
What Factors to Consider While Investing in ELSS?
Some of the important factors to consider when investing in ELSS funds are:
While investing in ELSS funds, one must have a long-term horizon as the returns are market-linked. The extended time horizon is advantageous for mitigating market volatility.
The returns on debt mutual funds are steady, whereas the returns on ELSS are determined by the performance of the underlying stocks. Therefore, the long-term returns for equity-based funds outperform any taxable savings scheme.
Unlike debt mutual funds, ELSS funds have a lock-in period of three years. A policyholder cannot withdraw funds for three years after the date of investment.
How to Invest in ELSS Funds?
An applicant must be KYC compliant to invest in an ELSS fund. Investments in the fund can be made either physically by visiting the mutual fund office or online. The online method entails going to the fund house’s official website and filling out the relevant information and submitting required documents.
Once invested, the policyholder is assigned a folio number. All future investments can be made by referencing the folio number of the mutual fund. It is important to note, that investment in ELSS funds can be made either in lump-sum or through SIP.
Considering the risk factor, it is best to make SIP investments. Through SIP, you stagger your investments over a period. Investing through a SIP allows you to reap the benefits of acquiring fund units throughout market cycles, boosting capital returns. Lump-sum investments in equities mutual funds are thus typically avoided.
ELSS funds are excellent financial tools for achieving all your life’s financial goals. However, before investing in the plan, it is critical to consider various factors such as historical performance, expense ratio, and so on.