There are several types of mutual funds on the market, and each type plays a specific role in the investor’s portfolio. While some funds help you generate wealth or earn regular returns, others are designed to allow tax savings. Equity-linked savings schemes (ELSS) mutual funds fall in the latter group. Here, we’ll talk about how they work and whether they are a suitable option for you.
What are ELSS mutual funds?
Equity-linked savings schemes are equity funds. These are open-ended schemes that allocate a large portion of your corpus to equity or equity-related instruments. They have a 3-year lock-in period and are preferred by investors primarily for the tax benefits they offer, not to mention the potential for wealth creation due to stock market volatility.
If you are new to the world of investing and have been looking for a way to park your money in equities, ELSS funds can be a good place to begin. Since a professional fund manager will use their understanding and expertise to make decisions about which securities to invest in, you gain indirect exposure to the market. However, the most attractive feature of ELSS funds is that they allow maximum deductions of Rs. 1.5 lakh under the Income Tax Act’s Section 80C.
Things to consider before investing in ELSS mutual funds
- Moderate to high-risk profile
The function of ELSS funds is to invest your money in equities, which inherently carries a certain risk due to market fluctuations. As a result, the returns are not guaranteed. However, if you opt for a longer tenure of investment, you can take advantage of these fluctuations and maximize the fund’s potential.
Historically, these funds have been known to provide investors with average returns ranging between 10 and 15 percent when held over three years. Of course, these returns rely on market conditions, but staying invested for longer generally increases your chances of mitigating risks and earning above-average returns.
- Lock-in period
One of the features of ELSS funds is the lock-in period of 3 years. You cannot redeem your investment during that period, but that might be a blessing in disguise for new investors who express concern at the slightest dip in the market. Since these schemes are intended to be for the longer term, the lock-in period serves as an incentive to stay invested and manage the ups and downs of the stock market.
- Significant tax-saving advantages
This is the biggest draw of ELSS funds. Under Section 80C of India’s Income Tax Act, 1961, you can claim the maximum deduction of Rs. 1.5 lakh per year. This makes a huge difference to your financial goal of wealth creation and helps you enhance the potential long-term capital gains on your investment.
While ELSS funds may share some characteristics with equity mutual funds, the difference is that equity mutual funds don’t have a lock-in period or tax-saving provisions.
ELSS mutual funds can be an ideal choice if you have a lower risk tolerance but would still like to benefit from equity and earn higher returns. Make sure you compare different ELSS Funds on the Tata Capital Moneyfy App, look at their historical returns and ratings, and make the right choice that aligns with your financial goals.