Tax saving mutual funds are like any other mutual funds with the added advantage of tax-saving attributes. One of the most famous tax-saving investments among investors is ELSS. Equity Linked Savings Scheme (ELSS) offer tax deductions to investors. ELSS funds invest at least 80% of their corpus in equity and equity-related instruments.
Why should you invest in ELSS?
- Tax saving investments
ELSS funds are also known as tax-saving mutual funds as they are eligible for tax deductions for investments up to Rs1.5 lakhs per annum. You can save up to Rs46,800 by investing in these tax-saver mutual funds.
- Lowest lock-in period
ELSS funds relish the lowest lock-in period amongst all Section 80C tax-saving investments. While the Fixed Deposits and the Public Provident Fund (PPF) have a lock-in period of 5 and 15 years, respectively, ELSS funds are endowed with just a 3 year lock-in period.
- Higher returns
As ELSS mutual funds invest principally in equity-related securities, the returns are considerably higher than any other tax-saving investments. While alternate tax saving investment havens offer returns at an average of 6 to 8%, ELSS offers an average return of a whopping 12 to 14%.
- Lower tax on capital gains
As ELSS mutual funds are mandated to be invested for a minimum of 3 years, gains earned from their sale are long-term in nature. Long-term capital gains (LTCG) above Rs1 lakh is taxed at the rate of 10% without the benefit of indexation.
- Power of compounding
Though the lock-in period for ELSS mutual funds is quite low, investors are advised to invest for a minimum of 5-10 years to achieve their long-term financial goals. This enables investors to benefit from the power of compounding, also known as the eighth wonder of the world in the long run.
- Ease of investment
You can invest in ELSS via a lumpsum mode or a Systematic Investment Plan (SIP) mode. While the lumpsum technique requires all the capital to be invested in one go, SIP offers the liberty to invest a fixed amount in periodic intervals. SIP also aids to instil financial discipline among investors.
Just like any other type of mutual fund, ELSS funds are regulated by the Securities and Exchange Board of India (SEBI) and are entirely transparent and safe. All Asset Management Companies (AMC) that are managing ELSS funds have to provide regular disclosures about the key performance of these funds. Hence, it isn’t surprising that no mutual fund tax saver displays a higher degree of transparency than ELSS funds yet.