Mutual Funds are an investment vehicle that aids investors across spectrum to get professional management of their money at a very nominal costs.
Now, each mutual fund is suited for different purposes. Today we will talk about ELSS or Equity Linked Savings Scheme type of Mutual Fund which is very popular in India.
What is ELSS and Why Should You Consider It?
Equity Linked Savings Scheme (ELSS) is a type of mutual fund in India that primarily invests in equity and equity-related securities. Designed to encourage long-term investing, ELSS comes with a three-year lock-in period, making it the shortest lock-in among tax-saving options. It also offers potential for higher returns compared to traditional savings instruments, making it an attractive choice for investors looking to grow wealth while saving on taxes.
Why is ELSS Used?
ELSS funds provide dual benefits: capital growth and tax savings under Section 80C of the Income Tax Act, allowing a deduction of up to ₹1.5 lakh in a financial year. Investors can choose between the old tax regime, where ELSS investments help reduce taxable income, or the new tax regime, which offers lower tax rates without deductions. Those opting for the old regime benefit the most from ELSS’s tax-saving advantages.
When to Invest in ELSS?
Consider ELSS as an investment vehicle – if you are in the old tax regime or if you are willing to take on a moderate to high-risk profile for potential long-term gains.
ELSS can be a good choice if you aim to build wealth with tax efficiency and are comfortable with a three-year lock-in period, which helps to smooth market volatility over time.
Potential Returns
ELSS has historically offered returns between 10–15% annually over the long term, though returns are market-dependent and not guaranteed.
After understanding a bit about ELSS Mutual Funds, let us try to see the pros and cons linked to ELSS for an ease of remembrance so that you can decide to proceed accordingly to save taxes while building wealth
Advantages of ELSS:
1. Tax Savings: Allows deductions under Section 80C
2. Wealth Creation: Potential for higher returns than traditional tax-saving tools (like PPF, NSC, Tax-Saver Fixed Deposit, etc.)
3. Shorter Lock-in Period: Only three years, the shortest among Section 80C options
Disadvantages of ELSS:
1. Market Risk: Returns depend on market performance, which can be volatile
2. No Guaranteed Returns: Unlike fixed deposits, ELSS does not offer fixed returns
3. Limited Liquidity: Funds are locked for three years, restricting access to capital
Summary:
ELSS funds can be a valuable addition for investors in the old tax regime aiming to balance tax savings with long-term wealth generation
Also, while investing in Mutual Funds(whether ELSS or Debt-Oriented or Multi-Asset), what are the best Dos and Don’ts, I have shared an answer earlier
What are are some handy tips to help maximize mutual fund returns?
Hope this helps
All the best
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Happy Investing and God Bless!
About the Post Author:
The Author is an AMFI registered Mutual Fund Distributor (ARN-262589). Reach out to him via email: edteficonsult@gmail.com
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