When it comes to saving taxes with the help of mutual funds, ELSS stands out among the traditional ways of tax investing due to its benefits, such as liquidity, tax treatment, higher returns and ease of investing. ELSS mutual funds are open-ended diversified equity mutual fund schemes which have a lock in period of 3 years, offering tax benefits to investors under Section 80C of the Income Tax Act, 1961. One can invest in tax saving mutual funds through SIP (Systematic Investment Plan) or through lumpsum method (One time investment). ELSS mutual fund investment also has distinctive features which make them a popular choice when it comes to investing for tax saving purposes. Here a few of them-
- Management of the investment – ELSS is managed by professionals who are well-versed when it comes to understanding the ups and downs of the market. They are experienced fund managers whose primary goal is to generate best returns from the fund. Hence, investors are in good hands when they choose ELSS for tax savings.
- Least lock-in period – ELSS mutual funds has the least lock-in period of 3 years compared to PPF (15 years) and bank fixed deposits (5 years).
- Dividend payout option – You can opt for dividend payout option on your investment which helps you realize some potential gain during the lock-in period of 3 years. You must also note that dividend payments are made from the NAV of the ELSS mutual funds and therefore, the NAV of the scheme will fall to the extent of the dividend payment on the date of dividend. Dividends are subject to availability of distributable surpluses in the scheme.
- Mode of investment – One can invest in ELSS mutual fund schemes through SIP which helps them take advantage of rupee cost averaging and the best part is that it does not feel very heavy on the pocket. With customised investing like a systematic investment plan, one can invest in mutual funds with small amounts for a long term tenure, in order to make the best out of their mutual fund investing.
- High returns – ELSS mutual funds not only have the lowest lock-in period but also have the potential to earn very good returns. However, they come with higher exposure to risk. But, this can be mitigated by investing with a long-term approach. This way, you spread your risk over a longer tenure and benefit from the potential to earn better yields.
Who should invest in ELSS funds?
- An individual or HUF who is eager to start their mutual fund journey while having the intention to save taxes.
- An investor with partial or substantial knowledge on the ups and downs of the equity market and can understand how ELSS investing works.
- New working professionals who aim to invest for the long term as well as start saving taxes, can also invest in tax saving mutual funds.
- Investors with long term financial goals such as buying a house, child education, wedding, etc. can also invest in ELSS mutual funds.
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With multiple benefits and ease when it comes to starting the investments, ELSS are tax saving mutual funds which are gaining popularity among investors due to its various benefits.