Equity-linked Saving Schemes (ELSS) are a type of mutual fund that offer tax benefits to investors. In addition to the tax benefits, ELSS funds are also an effective way to create wealth over the long term.
Equity-Linked Savings Schemes (ELSS) are popular investment plans for those looking to save on taxes and create wealth. Here are seven ways in which ELSS funds can help you save tax and create wealth.
7 Ways ELSS Funds Can Help You Save Tax and Create Wealth
Tax Exemption
Under Section 80C of the Income Tax Act, investments in ELSS funds are eligible for tax deductions of up to ₹1.5 lakh per financial year. This means that if you invest ₹1.5 lakh in an ELSS fund, you can claim a tax deduction of the same amount, reducing your taxable income and ultimately saving on taxes.
Diversified Investment
ELSS funds invest primarily in equities, providing diversification to your portfolio. Diversification helps to spread the risk across different sectors and companies, reducing the impact of any negative performance by one particular stock. By investing in a diversified portfolio of equity shares, you are spreading your risk across different companies and sectors. This reduces the chances of losing all your money in case of a market downturn. Additionally, ELSS funds are managed by professional fund managers who have the expertise and experience to select the best companies to invest in.
They have a lock-in period of three years, which means that once you invest in an ELSS fund, you cannot withdraw your money for three years. This feature makes ELSS funds a great option for long-term investment plans.
High Returns
ELSS funds can potentially deliver higher returns than traditional fixed deposit or debt funds. Another benefit of ELSS funds is that they offer higher returns compared to other tax-saving options such as Public Provident Fund (PPF) or National Savings Certificate (NSC). While these options may offer tax deductions, they do not offer the same level of returns as ELSS funds. For example, the average returns of ELSS funds have been around 12% per annum over the past five years, while PPF and NSC have offered returns of around 7% per annum.
Short Lock-in Period
ELSS funds have a lock-in period of three years, which is the shortest among all tax-saving investment plans. This means that you can exit the fund after three years, unlike other tax-saving options like NSC and PPF, which have a lock-in period of five and 15 years, respectively.
One-time Investment Plan
ELSS funds are also a great option for those who want to invest in a one-time investment plan. Unlike other tax-saving options such as PPF or NSC, where you have to make regular investments over a period of time, you can invest a lump sum amount in an ELSS fund and enjoy the ELSS tax benefits.
ELSS funds are open-ended, which means you can invest in them at any point in time, unlike other tax-saving investment plans like NSC and PPF, which have a specific investment period.
Systematic Investment Plan
You can also invest in ELSS funds through a Systematic Investment Plan (SIP). SIP allows you to invest a fixed amount at regular intervals, which is a great way to save for the long term.
For those who want to make regular investments, ELSS funds also offer a Systematic Investment Plan option. With a SIP, you can invest a small amount of money at regular intervals, such as every month. This makes ELSS funds a great option for those who want to start investing small amounts and gradually increase their investment over time.
Flexibility
ELSS funds offer greater flexibility compared to other tax-saving options. You can choose to invest in a fund that aligns with your investment goals and risk appetite. You can also switch between funds, which gives you the flexibility to adjust your investment strategy as per market conditions.
Wrapping Up
ELSS funds are a great option for those looking to save tax and create wealth. They offer ELSS tax exemptions, diversification, high returns, a short lock-in period and a one-time investment plan. It is always recommended to consult a financial advisor or a professional before making any investment decisions. It is also important to note that investments in mutual funds are subject to market risks, so it is essential to invest only what you can afford to lose and diversify your portfolio.
