Are you looking for investment options and ways to avail yourself of tax benefits?
But finding one is difficult since you don’t want to invest in two different investments to fulfill your goals! Don’t worry; the ELSS mutual fund is the solution to your problem. In fact, it is the best tax saving mutual fund.
These mutual funds offer higher returns and provide tax benefits under section 80 C of the Income Tax Act, resulting in high demand among smart investors.
In this article, you will learn about ELSS funds, their considerations, and why this investment plan can be a perfect fit for you.
What are ELSS Mutual Funds?
ELSS (equity-linked savings scheme) Mutual Fund provides capital growth and tax deduction under section 80 C of the Income Tax Act.
These mutual funds are primarily invested in equity-related securities and offer dual benefits, such as tax deductions and good returns. They have a tenure of about three years before the investors can collect the investment and the return.
These mutual funds are said to be used for tax saving options, resulting in the most preferred Mutual Fund for people seeking tax saving options. The tax benefits lead investors to potentially collect more than Rs 150,000 in tax rebates every year. Plus, if someone is investing in the long term, they can claim up to 10–12% in returns. People willing to invest up to Rs. 9000 per month prefer this type of mutual fund.
Types of ELSS Mutual Funds
There are three types of ELSS Mutual Funds, all three with different investment purposes and requirements. Let’s get to know about these three types in detail.
Growth Scheme
A Growth scheme aims to provide long-term capital for investors. These schemes cannot be redeemed in the middle and can only be withdrawn after the maturity date. The total NAV of the fund boosts the profit by several times.
Dividend Scheme
A dividend scheme is not bound by any lock-in period and can be withdrawn without compromising tax benefits. The scheme provides its investors with some extra profits according to the availability of surplus.
When you invest in an ELSS mutual fund scheme, there are two options before you. You can choose to get a dividend from the investment, or you may not opt for a dividend option. When you select a dividend payout option, you are qualified to get it when the fund declares any. Plus, you can also get a dividend during the lock-in period of three years.
Dividend Reinvestment Scheme
A dividend reinvestment scheme is when investors reinvest their dividends to boost their profits. This scheme is optional and is preferred when the market is shooting up.
Investor reinvesting their dividends instead have the chance of getting more units flowing into their fund. This only increases their investment capital in the fund.
Features of ELSS Mutual Fund
ELSS mutual funds have several characteristics that differentiate them from other types of mutual funds. Here are some of the key features you must know about —
Tax Saving
ELSS mutual funds are tax saving mutual Funds. Under section 80 C of the Income Tax Act, investments made in ELSS Mutual Funds can be claimed for up to 1.5 lakhs of tax reduction, while individuals or companies earning below one lakh are tax-free. Companies making revenues of Rs. 1,00,000 and more are charged with a 10% capital gain tax.
Short Tenure
ELSS (equity-linked savings schemes) Mutual Fund is said to be the shortest tax savingfund, as its tenure is three years. It allows you to draw the holding amount after the tenure is completed.
Affordable
ELSS Mutual Fund is affordable for individuals from different economic situations. The minimum investment amount starts from only Rs.500 and has no upper limit.
No Upper Limit
These mutual funds do not have an upper investment limit, meaning an individual can invest as much as possible. But remember that the tax reduction amount, which is 1.5 Lakhs, will not change irrespective of the investment amount.
Dual Benefits
ELSS Mutual Fund offers dual benefits like a high return on investment and tax deduction of up to 1.5 lakhs per annum, resulting in investor satisfaction.
Benefits of ELSS, the Best tax saving Mutual Fund
The features only speak for the benefits ELSS mutual funds offer to the investors. However, here are the benefits of ELSS mutual fund –
Tax Saving
Investments made in ELSS Mutual Funds offer a Tax deduction of up to Rs. 1.5 lakhs per year under section 80C of the Income Tax Act, 1961. These mutual funds have a short lock-in period, which is the shortest compared to other tax saving options.
Flexible Investment Options
ELSS mutual funds offer flexible investment options. These mutual funds allow investors to invest in SIPs (systematic investment plans) or directly in a lump sum amount, depending on their convenience.
Reduced Risk
Investment in ELSS Mutual Fund is made in diverse securities and industries, ensuring high returns and reduced loss risk.
Diverse Portfolio
Investing in diverse securities is essential for risk management and high returns. ELSS mutual funds are the best tax saving mutual fund; a good reason behind this is that these funds invest in stocks from various industries, reducing the chances of losses. These funds help diversify sectors and adapt new investment styles.
Withdrawal Flexibility
ELSS mutual funds allow investors to withdraw their profits during the mutual fund’s lock-in period, allowing them to access their money when needed.
Annual Investments
ELSS mutual funds are open and allow their investors to invest annually, which means they allow annual investments. These can be done by investing a lump sum amount or SIP.
Factors to Consider Before Investing in ELSS Mutual Funds
Every investment has its own pros and cons, and different investments have different requirements and returns. So, it is essential to consider a few factors before you invest in any sort of investment. Let’s look at the top four factors that are very important to consider before investing in ELSS Mutual Fund.
Lock in Period and Time Horizon
The lock-in period is one of the major factors to consider before investing in an ELSS Mutual Fund. These funds have a lock-in period of three years, which means investors cannot withdraw their holding amount for three years. However, they can withdraw their dividends at any time during the tenure.
Returns
The second factor is returns. ELSS mutual funds are tax saving mutual funds and are subject to market risks, which means their returns depend on the stocks and securities. Therefore, the longer the lock-in period, the higher the returns.
Risk Tolerance
ELSS Mutual Funds are invested in equities that are subject to market risks. Investor profits depend on the stock market, so evaluating your risk tolerance and capacity to handle market fluctuations is crucial.
Expense Ratio
The expense ratio is the annual charge to its investors for management costs, such as professional portfolio managers. It is important to consider this factor because the higher the expense ratio, the lower the profits. So, make sure your expense ratios are low.
Conclusion
With thousands of investment options, the ELSS mutual fund is one of the unique investments and might turn out to be one of the best investment plans you can ever make. Invest your money in the right place and let your investment do its job. You can enjoy higher returns while saving taxes and watch your life turn with ELSS mutual funds.
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