TAX SAVING MUTUAL FUNDS: THINGS TO KNOW BEFORE INVESTING IN ELSS
Investing in mutual funds is one of the simplest ways to grow wealth. But what if we tell you that you can save tax while increasing your wealth? That would be terrific, right? ELSS is the perfect investment option for you, then. ELSS, also known as Equity-linked Savings Schemes, are mutual fund investments that have gained traction in the last decade for all the right reasons. Investments in ELSS funds are eligible for a tax deduction of up to Rs 1.5 lac under Section 80C of the Income Tax Act, 1961. However, before you invest your hard-earned money in these mutual funds, here are four things you must know about ELSS mutual funds:
1. How much should you invest in ELSS?
Let us assume that Gaurav would be saving Rs 4 lacs this year. He wishes to invest in mutual funds to attain higher returns. He has already contributed Rs 50,000 in other Section 80C investments, such as Public Provident Fund (PPF) and Employee Provident Fund (EPF). In such a case, Gaurav should invest Rs 1 lac in ELSS tax-saving mutual funds for that financial year. This is because the upper limit of tax exemption u/s 80C is Rs 1.5 lacs p.a. He may consider investing the rest of Rs 4 lacs towards equity funds without a lock-in period.
2. When to invest in ELSS?
Like any other type of mutual funds, ELSS mutual funds are predicted to move up and down through a year. Allotting a lumpsum investment could yield alarming returns if you enter the market incorrectly. This is one of the reasons why experts recommend investing in ELSS funds via a monthly SIP (Systematic Investment Plan). SIP helps investors benefit from rupee cost averaging and instills much-needed financial discipline among investors.
3. When will I get back the amount invested in ELSS?
Redemption in tax-saving mutual funds occurs on a “first in, first out” basis. For instance, if you made a monthly installment on 3rd May 2015, you can redeem it on 3rd May 2018. A similar redemption cycle will be trailed for other months’ SIP investment.
4. Investors should hold on to their ELSS mutual fund units for a long run
Although ELSS funds have a lock-in tenure of three years, experts advise investors to stay invested for a longer duration, say ten years or more. Historically, mutual funds have yielded significant returns when held for a prolonged period. This is why experts often advise investors to link their ELSS investments with their long-term investment objectives so they do not exit the markets at the slightest hints of volatility.
Irrespective of the type of investment you decide for your investment portfolio, ensure that it aligns with your financial goals, risk profile, and investment horizon. Happy investing!
