Unlocking wealth: The benefits of investing in ELSS mutual funds

Over the last couple of decades, mutual funds have emerged as a popular investment option in India. These instruments allow even new investors to benefit from the expertise of professional money managers and potentially meet their financial goals.

However, some mutual funds offer the additional benefit of tax savings. For example, investing in ELSS (Equity Linked Savings Scheme) mutual funds can help individuals reduce the impact of taxes eating into their returns.

Let's discuss some of the reasons as to why we should invest in ELSS mutual funds and how it can benefit us.

• Table of contents

1. What are ELSS mutual funds?
2. ELSS mutual fund investment benefits

What are ELSS mutual funds?

ELSS mutual funds are a category of equity mutual funds that offer tax benefits under Section 80C of the Income Tax Act, 1961. In fact, ELSS is the considered as a tax-saving mutual fund in India. These schemes combine the potential for returns that come with equity investments with the advantage of tax savings, making them a popular choice among investors.

ELSS mutual fund investment benefits

• Tax benefits

One of the primary reasons to invest in the ELSS scheme is the tax benefits it offers. When you invest in ELSS, you can reduce your taxable income by up to Rs. 1.5 lakh annually under Section 80C of the Income Tax Act,1961. While there is no upper limit to the amount that can be invested in ELSS, only a maximum of Rs. 1.5 lakh is eligible for a tax deduction as per the IT Act. Investing in tax-saving options not only reduces your tax bill, it also encourages a disciplined approach to long-term wealth creation. This could be a win-win situation, as you are simultaneously investing for your future and reducing your tax burden.

• Lock-in period and flexibility

ELSS is unlike any other mutual fund where money can be withdrawn anytime. This is because ELSS schemes have a lock-in period of three years. But it is also the shortest among all tax-saving instruments available under Section 80C of the Income Tax Act, 1961. This means your money isn't tied up for an extended period providing you with liquidity after 3 years if needed along with the added tax benefits. Additionally, once the lock-in period is over, you have the flexibility to stay invested or exit based on your financial goals. This blend of lock-in period and flexibility offers a balanced approach for investors.

• Potential for higher returns

ELSS funds primarily invest in equities, which have historically delivered a relatively better return potential compared to traditional tax-saving options like PPF or FDs. Traditional investments are safe as some of them have assured returns. While equity investments come with risks, their long-term growth potential is substantial, especially when held over the long term. However, it's important to remember that with higher potential returns comes higher risk, so a diversified approach is advisable.

• Diversification of portfolio

Investing in ELSS funds allows you to automatically diversify your portfolio. Since these funds primarily invest in a mix of equities – i.e., they invest in companies across market capitalisations – it helps spread the risk associated with stock market investments and can also help you beat inflation in the long run. Moreover, diversification can enhance the relative stability of your overall investment portfolio. Not putting all your eggs in one basket is a tried-and-tested strategy, and ELSS funds help you achieve it.

• Professional fund management

Like other mutual fund schemes, even ELSS funds are managed by experienced fund managers who analyse market trends, company performance, and economic indicators to make informed investment decisions. This professional expertise can be particularly beneficial for investors who may not have the time or knowledge to manage their investments actively. By entrusting your investments to professionals, you tap into their knowledge and experience, potentially optimising your returns and managing risk effectively.

• Systematic investment plan (SIP) option

Many ELSS funds offer the option of investing through a Systematic Investment Plan (SIP). This allows you to invest a fixed amount at regular intervals, promoting disciplined saving and benefiting from rupee-cost averaging. SIPs provide a structured approach to investing, ensuring that you stay committed to your financial goals.

Conclusion

ELSS mutual funds offer a blend of tax benefits, potential for returns, and flexibility that make them a valuable addition to any investment portfolio. However, it's crucial to remember that like any investment, ELSS funds also come with associated risks. It's advisable to align your investment strategy with your financial goals and risk tolerance. Consult with a financial advisor to select a suitable ELSS fund that gels with your investment objectives, risk appetite, and time horizon. Happy investing!

FAQs:

What are the tax benefits of ELSS investments?

ELSS (Equity Linked Savings Scheme) investments offer tax deductions under Section 80C of the Income Tax Act, 1961 making them a suitable option for tax-saving, while also providing potential for returns due to their equity exposure.

Is there a lock-in period for ELSS investments?

Yes, ELSS investments come with a mandatory 3-year lock-in period, which ensures that investors stay committed for the long term, while also getting the tax benefits.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.