Tax-saving mutual funds which are also known under the term Equity Linked Saving Schemes (ELSS), are a type of mutual funds in which investors can invest in order to reduce taxes under Section 80C of the Income Tax Act, 1961.
ELSS invests a significant portion of its investment portfolio into equity-related securities. These funds are subject to a lock-in period of three years, which means that the investment can’t be redeemed or withdrawn prior to the expiration of three years.
The money invested in ELSS funds can qualify for tax deductions of up to Rs. 1.5 lakh in accordance with Section 80C under the Income Tax Act, 1961. This deduction is available to individual taxpayers and Hindu Undivided Families (HUFs).
Inscribing into ELSS funds is not just beneficial in reducing tax burdens but also can lead to wealth creation over the long haul, as they invest in equity. However, it is important to note that like any other equity-related investment ELSS funds come with market risks and are suitable for investors who have a higher risk appetite and a long-term time frame for investment.
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Tax-saving mutual funds and Equity Linked Saving Schemes (ELSS) provide a variety of benefits to investors. Some of the most important advantages are:
Tax savings: ELSS funds offer a tax deduction of up the amount of Rs. 1.5 lakhs in Section 80C under the Income Tax Act, 1961. This deduction can help investors avoid paying taxes when they invest.
Better returns: ELSS funds place a substantial portion of their portfolio in equity-related instruments. In the long run equity investments have the potential to deliver higher returns in comparison to other asset classes, such as fixed deposits, debt, and so on.
Diversification: ELSS fund invests in diversifying portfolios of stocks across different sectors as well as market capitalizations. This helps in reducing the overall risk of the portfolio.
A long-term commitment: ELSS Funds come with a the possibility of locking-in for three years. This allows investors to remain in the long run and also helps to build wealth in the course of time.
Ease of investing: ELSS funds can be easily purchased and sold via intermediaries for mutual funds or through online platforms. Investors are also able to invest in ELSS funds with a tiny amount, making it affordable to everyone.
Overall tax-saving mutual funds, also known as ELSS funds give investors the opportunity to save taxes and also earn better returns over the longer term through equity investments. However, investors should consider their risk-taking capacity and investment objectives before purchasing these types of funds.