If you wish to save tax on your investments, it would be a good idea to invest in ELSS funds.ELSS or Equity-Linked Savings Schemes not only helps to save tax but also aids investors in fetching substantial yields on their investments due to the presence of equity-oriented funds. Hence, ELSS mutual funds are known to offer investors with dual benefits of tax saving and capital appreciation to investors. In this article, we will understand how ELSS funds are a good option for saving tax and investing in equities.

What are ELSS?

ELSS, short for equity-linked savings scheme are a type of mutual funds that predominantly invest their securities in equity-oriented funds. AMFI (Association of Mutual Funds in India) –the mutual fund regulator of India has mandated all ELSS funds to allot at least 80% of their assets to equities and equity-linked securities. These mutual funds allow investors to enjoy a tax deduction of up to Rs 1,50,000 per annum as per Section 80C of the Income Tax Act, 1961. ELSS funds are accompanied with a lock-in duration of three years.

Features of ELSS funds

  1. An investor cannot exit their mutual fund schemes before the completion of three years
  2. An investor can invest in ELSS funds through both SIP (systematic investment plan) mode of investment or one-time investment offered by lumpsum mode of investment
  3. There is no upper limit to investing in ELSS mutual funds. On the other hand, the minimum investment amount for investing in ELSS is as low as Rs 100 per month
  4. ELSS funds are the only tax saving mutual funds that also has the potential to earn inflation-beating returns.
  5. ELSStax saver mutual fundshave the potential to earn significant returns on their investments as these funds heavily invest in equities. Historically, ELSS mutual funds have offered double-digit returns to investors.
  6. While the portfolio of ELSS tax saving mutual funds is mostly comprised of equities and equity-linked securities, ELSS investments are also exposed to some fixed-income instruments as well.
  7. An investor can save up to Rs 46,800 per annum by investing a minimum of Rs 1.5 lacs in tax-saving investments such as ELSS funds provided that the investor falls in the highest income tax slab bracket.
  8. ELSS funds relish the position of lowest lock-in period among other Section 80C investments at just three years. Other section 80C investments have a lock-in period varying between 5 years to 15 years.

An investor investing in ELSS mutual funds must ideally have a long-term investment horizon. This is because ELSS investments are believed to work at their optimum capacity when invested for a prolonged duration. This is the reason why even though ELSS funds have a lock-in period of just three years, investors are advised to stay invested for a longer duration. They can consider linking their long-term investment goals to ELSS investments. Aggressive investor might consider ELSS funds due to the higher exposure towards equities. Happy investing!

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