What is ELSS (Equity Linked Savings Scheme) Mutual Fund ?

Every investor invests with the aim of achieving their financial goals. They can choose investments based on their risk appetite, how much returns they want, etc.While most investments can provide investors with stable returns, not many can also offer tax benefits. However, an equity linked savings scheme (ELSS) is one such investment option that allows investors to gain wealth and save on tax.

ELSS are tax saving mutual funds that can enable you to grow your capital and provide you with tax benefits. When you invest in these funds, you can get a tax deduction of up to Rs. 1.5 Lakh under Section 80C.ELSS tends to provide higher returns compared to other safer tax-saving investments , like NPS,tax-saving FDs, etc. But you must have a high-risk appetite if you want to invest in ELSS. Furthermore, you must know that ELSS has a three years’ lock-in period.

Lock-in Period

Investors should keep in mind that there is a lock-in period of three years.

Long-Term Capital Gains (LTCG) Tax

Income generated from the ELSS will be taxed as per the LTCG tax rules.

Allows Diversification

The money invested in an ELSS mutual fund is diversified across different sectors, market capitalisations, etc.

You Can Invest Using the SIP Method

While you can make a lump sum investment, ELSS also allows you to invest via the SIP method. Thus, you can make regular investments, earn returns, and save on tax.

Diversification

By investing in the best tax saving mutual funds , you can diversify your portfolio. As this fund invests across market capitalisations and sectors, you can make a diversified portfolio with ELSS.

Tax Benefits

This is one of the most important reasons why investors invest in ELSS. Under Section 80C, your investment in an ELSS is eligible for a tax deduction up to Rs. 1.5 Lakh.Furthermore, if you withdraw the funds after the three-year lock-in period, then you’ll have to pay LTCG tax on your gains. But if your gains are below Rs. 1 Lakh in one financial year, then LTCG isn’t taxed. However, if the gains are above Rs. 1 Lakh, then the LTCG will be taxed at 10%.

Set Your Investment Goal

While ELSS is a good tax-saving option, it can also help you achieve your investment goals. Therefore, you must assess if the ELSS you’ve chosen can enable you to achieve your investment goal. As there are many tax-saving options, you must consider whether ELSS mutual funds are right for your portfolio.

Select the Right Investment Method

You can invest in ELSS funds by making a lump sum investment or SIPs. Making a lump sum investment can be risky because you might invest in the market when it’s high. This can lead to lower returns. However, by making SIP investments, you can lower the risk as you keep investing, whether the market is low or high. This can help you gain stable returns.

Closing Note

Investing in an ELSS mutual fund can help you grow your wealth as well as reduce your tax liability. However, you must compare different ELSS mutual funds to know which one is right for you.