Why invest in tax saving mutual funds?

Are you an investor who wants to invest in mutual funds with dual benefits? Imagine a scenario where you get the opportunity to grow your wealth and also save taxes at the same time. It is possible with the help of tax saving mutual funds known as ELSS or ELSS funds.

The full form of ELSS is equity linked savings scheme. ELSS mutual fund schemes belong to the equity mutual fund category known as Equity: ELSS.  ELSS mutual funds qualify for tax deductions under Section 80C of the Income Tax Act, 1961.

ELSS funds are actually diversified equity mutual fund schemes which invest at least 80% of the scheme’s assets in equities or equity related instruments. Therefore, we can say that the returns of ELSS is market linked. Therefore, if you are investing in ELSS, then it has to be for the long-term goals such as creating a retirement corpus or buying a new house, etc. Therefore, not only you can save taxes, you can also meet your financial goals. Let us explore ELSS funds in more details.

Why invest in Tax Saving Mutual Funds?

• High returns – ELSS mutual funds carry in them a potential to yield high returns as they primarily invest in equities. So, combined with a long investment tenure and the right financial advice, one can grow their wealth over long term period with ELSS.
• Tax efficient – There is no short term capital gains as the units of ELSS mutual funds are locked-in for 3 years from the date of investment.
• Least lock-in period – ELSS tax saving mutual funds has the least lock-in period of 3 years compared to other tax saving instruments such as Public provident fund (15 years) and tax saver bank fixed deposits (5 years) and National saving schemes (5 years). During the lock-in period, one has to mandatorily keep their money invested for 3 years.
• Dividend payout option – An investor is given an opportunity to opt for dividend payout option on their investment in ELSS which may help realize some potential gains during the lock-in period of 3 years. A point to be noted here is that dividend payments are made from the NAV of the Scheme and therefore, the NAV of the scheme will fall to the extent of the dividend payment on the date of dividend. They are also subject to availability of distributable profit made by the scheme. Another point to be noted here is that the dividends are taxable in the hands of the investors.

• Easy accessibility – For new investors in the market, it is easy to start with an ELSS mutual fund investment with the help of SIPs. One can start investing in these tax saving mutual funds, with an amount as small as Rs. 500. And like other mutual funds, as and when your income increases you can increase your investment amount through SIP top-up.

• Dual benefits – As mentioned above, one of the primary reasons to make an ELSS investment is to get dual benefits of creating wealth and saving on income taxes. ELSS funds are primarily diversified equity funds, which means that they invest in companies of all sizes, be it small, medium or large. And, being an equity mutual fund, they possess the capability of creating wealth over the long term through equities.

ELSS funds are a wise choice for investors with medium to high risk capacity who want to invest for the long period of time to complete long term financial goals while saving taxes on the way.