Investing in ELSS Funds: Tax Saving & Long-term Wealth Generation
In the finance dynamic landscape, investors are always on the lookout for avenues that offer dual benefits of tax savings and long-term wealth creation. One such powerful investment tool that has gained momentum in recent years is Equity Linked Savings Scheme i.e ELSS mutual funds.
This blog will look into ELSS mutual funds and everything you need to know about them.
Understanding ELSS Funds
ELSS funds are a type of mutual funds which essentially invest in equities as well as equity-related instruments.
They come with a minimum lock-in period of three years, where redemptions cannot be made by investors.
By investing through ELSS funds, you get an opportunity to participate in the growth potential of the stock market while enjoying tax benefits under Section 80C of the Income Tax Act of 1961.
Tax-Saving Potential of ELSS Funds
Among other things that make ELSS funds attractive is their ability to help investors save taxes, too. An investor can claim up to INR 1.5 lakh deduction from their total income in any given financial year if they invest in them (ELSS).
As a result, this deduction significantly reduces taxable income. Furthermore, ELSS funds have the shortest lock-in period among all tax-saving investment options under Section 80C, making them more liquid compared to other traditional tax-saving instruments like the Public Provident Fund and National Savings Certificate.
Long-Term Wealth Generation
ELSS funds offer the possibility of creating wealth in the long term besides saving on taxes. They primarily invest in equities and are, therefore, designed to grow over a long period.
Nonetheless, equity markets may experience short-term fluctuations; however, historical data indicates that equities have outperformed other asset classes over extended periods.
When investors have invested in ELSS funds for a long time, they will benefit from compounding and gradually build up significant wealth.
Benefits of Investing in ELSS Funds
Let’s look into the benefits of investing in these funds:
Tax Efficiency:
An alternative way of saving on tax with the potential for higher returns than traditional tax-saving instruments is investing in ELSS funds.
Diversification:
Exposure to different sectors and market capitalizations helps mitigate risks associated with individual stock selection by investing in a diversified portfolio of equities.
Professional Management:
The management of these funds is conducted by experienced fund managers who perform comprehensive research and analysis to identify suitable investment opportunities, thus able to maximize returns.
Liquidity:
This means that compared to other tax-saving instruments, such as PPFs and NSCs, which have very lengthy lock-in periods, ELSS offers more liquidity because it has a lock-in period of only three years.
Final Words
The combination of tax-saving benefits, higher returns potential, and shorter lock-in periods have made ELSS funds very popular among investors. However, it should be kept in mind that ELSS funds still bear market risks associated with equity investments. Hence, before opting for ELSS funds, investors must analyze their risk appetite plus what they expect from the investment.
