PROSPERR.IO

Tax season is almost here, and with it comes the scramble to find the best tax-saving options. While Public Provident Fund (PPF) and the National Savings Certificate (NSC) are popular choices, ELSS (Equity Linked Saving Scheme) Tax Saving Mutual Funds are increasingly gaining favor. 

But what exactly are ELSS funds, and are they right for you?

1. An overview of ELSS mutual funds 

An ELSS, or Equity Linked Saving Scheme, is a special type of open-ended mutual fund that invests a significant portion of its corpus (pooled money) in the stock market. Unlike traditional mutual funds, ELSS offers a dual benefit:

• Potential for Wealth Creation: ELSS funds invest primarily in the stocks of companies, which can offer significant growth over the long term. Historically, ELSS funds have delivered average returns of around 15%.
• Tax Savings: Investments in ELSS qualify for a tax deduction of up to ₹1.5 lakh under the Income Tax Act.

Also Read- The Benefits of Digital KYC in Mutual Fund 

2. Lock-in Period

Unlike some other tax-saving options, ELSS comes with a mandatory lock-in period of 3 years. This means your investment is locked in for 3 years from the date of investment. However, this is the shortest lock-in period compared to other popular options like PPF (15 years) and NSC (5 years).

3. SIP in ELSS Mutual Funds

A smart way to invest in ELSS, especially for beginners, is through a Systematic Investment Plan (SIP). SIP allows you to invest a fixed amount of money regularly (monthly, quarterly) into your chosen ELSS fund. This inculcates investment discipline and benefits from rupee-cost averaging, which helps you average out the cost of investment over time.

Also Read- Best Mutual Funds for Salaried Individuals 

4. ELSS vs. Other Tax Savings Options:

Here's a quick comparison of ELSS with other popular tax-saving options to help you decide:

5. Long-Term Investment in ELSS

ELSS are best suited for long-term financial goals (5 years or more) due to their equity-linked nature. The stock market can be volatile in the short term, but historically, it has provided good returns over longer periods.

Also Read- Why Mutual Funds are better than Fixed Deposits 

6. Choosing the Right ELSS Mutual Fund

With a plethora of ELSS funds available, choosing the right one can be overwhelming. Consider these important things:

• Investment Objective: Align the fund's objective (large-cap, mid-cap, etc.) with your risk appetite and financial goals.
• Fund Performance: Look at the fund's historical performance, but remember that past performance doesn't guarantee future results.
• Expense Ratio: A lower expense ratio indicates lower fund management fees, impacting your returns.

Ready to Invest in ELSS Mutual Funds Online?

Many investment platforms allow you to conveniently invest in ELSS funds online. Ensure the platform is reputable and SEBI-registered.

Also Read- Mutual Fund SIP or Lump Sum: Which Is a Better Investment Mode? 

Conclusion

ELSS can be a powerful tool for wealth creation and tax savings, but careful research and a long-term investment horizon are crucial. ELSS mutual funds offer a compelling proposition for savvy investors seeking a powerful tool for wealth creation along with valuable tax benefits. While the stock market can be volatile in the short term, ELSS's equity focus allows for potentially significant long-term returns, historically averaging around 15%. So, if you're looking to grow your wealth while saving on taxes, ELSS might be the perfect addition to your investment portfolio. 

(Disclaimer: The information provided in this blog post is intended for general informational purposes only and should not be construed as financial advice. It is essential to consult with a financial advisor to determine the best investment strategy for your individual circumstances.)