Tax saving mutual fund: Why to go for ELSS?

mutual fund

One should always do planning related to their tax related investments in advance. One should also invest via SIP route in ELSS to get the benefit of rupee cost averaging. Investing in tax planning schemes is a main priority for those who are yet to confirm their tax related investments for the present financial year. Apart from doing investment in Public Provident Fund (PPF or similar things, one should consider Equity Linked Saving Schemes (ELSS) for the persistence of tax planning. commonly known as tax saving funds, ELSS is one of the tax saving instruments that qualifies for deduction under Section 80C.

Come on, if you are going to invest in mutual funds then you can think of Tax-free mutual fund. You know ELSS is a characteristically diversified mutual fund equity scheme that accompanies tax breaks and need a lock- in period of three years from the date of investment. In case you invest in an ELSS through a systematic investment plan (SIP), every single investment is going to be locked in for three-years from its particular investment date.

What is the significance of ELSS funds?

By investing in ELSS mutual funds, you are eligible for tax deduction up to Rs. 1, 50,000 u/s Section 80C of that of Income Tax Act. In case you invest Rs. 1, 50,000 in ELSS, you are going to save Rs. 45,000 (thirty percent on top tax bracket). So the amount that you plan to invest in ELSS could be deducted from your income before scheming taxes. This is subject to a general cap of Rs. 1, 50,000 on the investment sum coupled with other tax saving instruments.

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Start investing early

Many of the tax-payers normally incline to start investing in ELSS funds only towards the end of the current financial year, when the time to submit investment proof is lurking on them. This is a bad investment and tax-planning technique. In such an instance, one could face cash flow related issues towards the end of the financial year. Moreover, investing towards the end of the year pushes the investors to put lump sum amount in ELSS. This, in turn, forms the risk of market judgment. In case the equity markets are up, the investor ends up buying the fund’s units at higher valuations that in turn impacts his returns. One should always plan their tax related savings in advance and invest through SIP route in ELSS to fetch the benefit of rupee cost averaging.

Keep on investing beyond three years

Amidst all the tax-saving products, ELSS funds cater the shortest lock-in of three years. In other products, the lock-in duration varies from 5 to 15 years. A common error most investors make is to cash their investments in ELSS as soon as the three-year lock-in ends. As the underlying asset class here is equities, they must stay invested for a time horizon of at least five to seven years to gather good returns. Hence, one must not pull out his money as soon as the three year lock-in comes to an end. Though ELSS gives tax break, it also has the potential to produce superior returns when related to other asset classes also beat the inflation in the long run. ELSS funds are apt in the tax saving lot till date as these are the funds that suit every category of investor.

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Thus, if you have not considered the concept of ELSS yet, then go ahead and do it now.

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