When it comes to tax saving investments, investors look for liquidity and high returns. An Equity-Linked Saving Scheme (ELSS) is a category of mutual fund that serves both purposes. A tax saver mutual fund is eligible for deduction under Section 80C of the Income Tax Act, 1961.
This article lists several other reasons why ELSS funds are becoming popular among investors:8
1. Lowest lock-in period
ELSS funds have the lowest lock-in period of three years as compared to other tax saving instruments such as Public Provident Fund, long-term deposits, etc. The ELSS investment becomes liquid once the lock-in period is over.
2. Higher returns
Since ELSS funds invest in equity schemes, they offer higher returns (15% to 20%) as opposed to other tax saving mutual funds (usually, 7% to 10%). Over three years, the high returns coupled with the benefit of compounding makes ELSS one of the best bets to park your money.
3. Option available for Systematic Investment Plan (SIP)
When you invest in ELSS, you can choose from two investment options – SIP or lump sum. SIPs allow you to invest a fixed amount at periodic intervals. It can be monthly, quarterly or semi-annually. This option instils the habit of saving in a salaried individual. You can set aside a fixed sum from your salary every month to pay towards SIP. This also ensures your tax planning becomes a more disciplined process.
4. Benefits of compounding
Most mutual fund advisors advise investors to invest in equity funds for the long term – five to ten years. Since ELSS funds have a lock-in period of three years, they lead to disciplined long-term investment by default. Thus, you can benefit immensely from the power of compounding in the long run.
5. Easy to invest
Investing in ELSS is simple. You need to fill in a one-time KYC document. If you register a SIP, the contribution process gets into auto mode. The fixed amount can be deducted from your account as per specific intervals set by you.
6. No need for monitoring
ELSS fund is an auto wealth-creator where you can stay passive in the investment process. You do not have to put in an effort to monitor the market’s movements constantly. Mainly, when you invest through SIP, your money is spread over a period of time. Thus, only parts of your investment are subject to the market’s volatility.
7. Ideal for first-time investors
ELSS can be an excellent entry point to equity participation for budding investors who don’t have much experience in the mutual fund market. If you are uncertain about equity funds, you can begin by investing in ELSS and later move on to promising equities.
8. No restrictions on investments
When it comes to investing in ELSS funds, there are no restrictions on the quantum of investment, unlike other tax saving options like PPF. If you find an ELSS performing well, you can invest beyond Rs. 1.5 lakh in one financial year.
Some factors to keep in mind before investing in ELSS
- A blanket exemption of Rs. 1.5 lakh under Section 80C includes other contributions such as PPF, insurance premiums, tuition fees, long-term deposits, etc.
- ELSS has a mandatory lock-in period of three years. Hence, you cannot liquidate your funds before maturity. Premature withdrawal could lead to a loss from the tax shield as the exemption gets added back to your taxable income.
Conclusion
ELSS has emerged as an important means of wealth creation and tax saving for investors. For anyone who wishes to gain good returns while saving taxes, ELSS mutual funds are worth considering.
