Mutual funds offer an attractive investment opportunity to people looking to invest in equities but do not have the time and resources to carry out extensive research. While there are many types of mutual fund schemes that invest in equities and allow investors to earn good returns, they do not offer any kind of tax benefits. So, for investors looking to generate wealth, get regular returns, and save taxes too, Equity Linked Saving Schemes are highly suitable. The ELSS or the Equity Linked Saving Schemes are tax-saving mutual funds. Read on to know more about them and their benefits.
ELSS and Their Features
- ELSS are funds that invest a majority of their corpus into equity or equity-related instruments. These schemes invest across a diverse group of equities allowing investors to have a diversified exposure.
- Investment in these schemes can be made through a lumpsum payment or a Systematic Investment Plan or SIP.
- The minimum amount of investment in these schemes is as low as Rs 500 allowing people with low savings to also participate and benefit from the movements in the equity markets.
- These funds have a lock-in period of three years but there is no maximum tenure for investment.
- These funds come with tax benefits. An investment of up to Rs 1.5 lakh in them is eligible for tax exemption under section 80C of the Income Tax Act. This exemption limit is for investments made in instruments like ELSS, NSC, tax-saving fixed deposits, and PPF.
- The income that you earn from investment in these schemes at the end of the three-year lock-in period is considered as long-term capital gains and taxed at a rate of 10% (if the income is more than Rs 1 Lakh).
Benefits of Investing in ELSS
Since the ELSS invest in equities, investors can look to earn good returns over a longer period. Highly suitable for investors aiming to create wealth to fulfil a long-term goal like funding their child’s higher education or buying a home or retirement planning, these funds offer returns higher than many other options. Here are some benefits of investing in ELSS.
- Exposure to Equities- Investment in ELSS allows investors to benefit from the changes in the prices of equities without worrying about timing the market. Also, these funds are managed by professionals who have the necessary expertise and knowledge to analyse the markets and invest accordingly.
- Lock-In Ensures Long-Term Investment- Investment in equities for a longer term is advisable for the generation of stable returns. Short-term investments in equities can prove to be highly risky. The lock-in period of ELSS ensures that investors do not get worried about the ups and downs in the market and take hasty decisions. Investors can continue to remain invested in these funds even after the lock-in to benefit from the effect of compounding and create substantial wealth.
- Tax Benefits- Investment in ELSS schemes is eligible for tax exemption under Section 80 C of the Income Tax Act.
- Disciplined Investing- Investment via the SIP route ensures that the investor becomes disciplined while spending and saves the committed amount.
To conclude, ELSS mutual funds are investment options that provide investors a chance to earn good returns and create wealth besides offering tax benefits.