A five-minute guide to ELSS

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Equity-linked savings schemes (ELSS) or tax savings schemes are an introduction to mutual funds. They are applicable for tax deductions under Section 80C of the Income Tax Act.

Under section 80C, the investors can reduce their taxable income up to 1.5 lakhs by investing in tax saving securities such as ELSS.

ELSS or tax saving scheme has a mandatory lock-in period of three years. Even though they have a lock-in period for a shorter duration, one should invest money in ELSS for at least five to seven years.

A majority portion of ELSS funds gets invested into equity or stocks. The stocks are highly volatile in the short-term period. If you invest in ELSS for a longer duration, the tax savings scheme will provide superior returns than other tax savings securities under Section 80C.

Most of the tax savings instruments permitted under Section 80C provide modest returns and are government-backed schemes.

ELSS is the best way to enter into an equity mutual fund because there is a lock-in period of three years, where investors cannot withdraw their money. During this time, they learn about the volatility and risks associated with the equity funds.

Investors earn good returns from ELSS and get the experience to stay through a rough market phase,  encouraging them to invest in equity funds.

The most attractive factor of ELSS is tax savings, but one can also assign them for long-term goals. These schemes follow a multi-cap strategy, where money gets diversified into large, mid and small-cap stocks. Thus, investors can follow a multi-cap investment strategy after the lock-in period ends.

ELSS mutual fund provided approximately 15.88% returns over ten years.

One should not invest in ELSS just for the sake of tax savings. One should have a higher risk appetite as the money gets invested into equity. If one does not have the risk appetite, sacrifice the extra returns and invest in conventional instruments such as bank deposits, provident funds, etc.

ELSS are helpful to meet long-term financial goals. Do not be in a rush to redeem them after the lock-in period ends. One can hold them as long as they are performing well. However, sell them a few years before the financial goal assigned to them to ensure that corpus does not get affected by the volatility of the stocks.

Some of the best ELSS schemes are:

  1. Invesco India Tax Plan
  2. Aditya Birla Sun Life Tax Relief 96
  3. Mirae asset tax saver
  4. Axis Long Term Equity Fund
  5. DSP Tax saver

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