One of the things that usually cause prospective investors to allocate funds to the market is that people have a misconception that they need to take all the actions themselves while investing in an already labyrinthine market. The other misunderstanding is that people believe that investments will be very expensive. And, if they faced any losses their investments are wasted. But the time is finally to throw out both of these misconceptions. First of all, in case you decided to invest in either mutual funds or any of their types, you can enjoy the assistance of fund managers, who are responsible for investing on your behalf. About mutual fund investments being expensive, lump-sum investment is just one of the two investment options available. If it happens to be that you don’t have the required money at hand, you could opt for a SIP or systematic investment plan.
However, before deciding on an investment scheme, it is important to check its features. While searching, you are required to look for investment plans that will help you to both generate tax-free income and save tax. The only type of mutual fund that you can allocate funds to for tax purposes is the equity-linked saving scheme or ELSS.
What is ELSS?
Amongst the several types of mutual funds, an equity-linked savings scheme or ELSS is known for allocating funds to equities. But one of its best features is that they are eligible for tax deductions. This is because of the provisions of Section 80C of the Indian Income Tax Act, 1961.
By opting for ELSS, you can enjoy a tax rebate of nearly ₹1,50,000 and even save up to ₹46,800 a year in taxes. Fund allocation in this type of mutual fund is mostly directed towards equity-linked securities and equity. Hence, in case your funds are invested in ELSS, your funds can be allocated to things like listed shares. Other than listed shares, your funds may also have some exposure to fixed-income securities too. However, it is important to remember the important fact that ELSS comes with a lock-in period of just three years.
What are the benefits associated with ELSS?
The benefits associated with ELSS funds are listed below:
- ELSS come with tax advantages:
One of the prominent reasons why you should consider opting for ELSS is that it enables you to enjoy tax deductions under section 80C of the Indian Income Tax Act, 1961. Thus, if you were to opt for an equity-linked savings scheme (ELSS), you can end up with a deduction of approximately ₹1,50,000 a year.
- ELSS doesn’t have any caps on investments:
When you opt to go ahead with an ELSS scheme, you have the freedom to invest any amount on the plan because there is no upper cap on these investments. However, it is important to remember that the minimum amount which is needed to be invested in ELSS varies across different AMCs. Before signing up for ELSS offered by an AMC, please ensure to check what is the minimum amount of investment for the ELSS offered by the firm.
- The revenue from these funds may not be impacted by inflation:
ELSS schemes are a tax-saving investment option that is known for coming with the potential to offer inflation-beating returns. Hence, if you have put money in an ELSS plan and the market is going through inflation, there is no need to worry. The income through the scheme may not be impacted by the current conditions of the market.
- They can also help create long-term wealth accumulation:
While these funds come with a lock-in of three years from the date of investment, instead of withdrawing after the end of the lock-in period, you can choose for the funds to remain invested. Doing so can help you to meet your goal which in this case would be to have enough wealth in your portfolio at the time of retirement.
- For a tax saving option, they have a short lock-in period:
A notable benefit of ELSS is that they have the shortest lock-in period for a tax-saving investment option. Unlike say, tax-saving fixed deposits, which come with a five-year lock-in, and PPF, which has a 15-year maturity, ELSS is known for coming with a three-year lock-in period.
While most equity-linked saving scheme investments are made to save on taxes, you can use these schemes to meet your long-term goals. Because of the multi-cap investment strategy of these funds, you can hold on to your ELSS scheme if it is performing well.