ELSS funds are mutual funds that are managed by financial professionals with years of experience, that help you in creating wealth over a period of time and let you save tax. If you are looking forward to investing in a scheme aiming to achieve medium-term financial objectives, ELSS serves you the best in various ways. Let’s understand every beneficial aspect of ELLS funds.
What are ELSS funds?
Equity-linked savings schemes are the only type of mutual fund that is eligible for claiming tax deductions under section 80C of the Income Tax Act 1961. The investment is majorly dominated by equity instruments only, i.e., shares.
Medium-term goals mean the financial objectives that you want to achieve in less than 5 years. The lock-in period of the ELSS scheme is 3 years only, which is enough to build an investment discipline and your tenure aligns with the lock-in period as well.
You will be able to save tax up to ₹1,50,000 under section 80C of the income tax act 1961. However, you can invest in the same scheme for more than the limit but you will not be able to avail of a deduction of more than said limit. You need to remember that the limit is not for investing in ELSS, it is imposed on overall investments in 80C.
Not only the principal, but you can also save tax on long-term capital gains up to ₹1,00,000. It means if you get returns less than ₹1,00,000, you do not have to pay tax on such returns. However, it is designed for investing in medium and long-term goals, you have to pay tax for short-term capital gains irrespective of the amount.
Other schemes like PPF offer up to 8% of returns against ELSS providing you up to 12% returns historically, which is quite significant in comparison to the peers. High returns with tax-saving opportunities will help you in accumulating a decent corpus at the end of the tenure you are planning.
The most significant advantage of investing through ELSS funds is it can be coupled with PPF. By using such a facility, you can diversify your portfolio in debt and equity with a ratio according to your risk tolerance. You will get the stability of debt through investing in PPF and growth opportunities from equity investment through ELSS funds.
The only way to hedge against volatility is patience. A lock-in period of 3 years helps you in staying invested in equity at a time when markets are highly volatile. It will prevent you from making decisions that lead you to regret things like panic selling, or buying in FOMO. Since your medium-term investment is mostly completed in the lock-in period, it might act as a shield against volatility.
Medium-term investments are the combination of short and long-term investment that has to be managed carefully by taking diversification, tax, time horizon, liquidity, and returns into consideration. ELSS could be the best combination for the same as the fund has the traits of both short and long-term investment schemes.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com