Investment options that offer tax benefits while simultaneously providing an opportunity to generate wealth are always a preferred combination in the investing community. The Government of India, u/s 80C of the Income Tax Act, 1961, offers several tax-saving investments to investors. These include PPF (Public Provident Fund), ULIP (Unit-linked Investment Plan), ELSS (Equity-linked Savings Scheme), EPF (Employees’ Provident Fund), Life insurance, Post Office Monthly Savings Scheme (POMIS) etc. Let’s understand how ELSS funds are different from these investment options.
How ELSS funds are different from other investment options?
Following are some of the reasons why ELSS mutual funds are a class apart:
Tax exemption on your mutual fund investments
The primary objective of ELSS funds is to help taxpayers save money. ELSS mutual funds are eligible for tax exemption for up to Rs1.5 lakh under Section 80C of the Income Tax Act, 1961. An investor can save up to Rs46,800 by investing in ELSS funds.
Short lock-in period
ELSS funds enjoy the shortest lock-in period of just 3 years. These funds enjoy the shortest lock-in period among all other tax-saving investments.
Opportunity to invest in equity while saving
ELSS mutual funds offer you the advantage of investing in equity to ride the growth cycle of the stocks in your investment portfolio. Tax-saving investments such as Fixed Deposits (FDs) and Senior Citizen Savings Schemes (SCSS) invest the majority of their corpus in debt instruments.
Significantly higher returns
As ELSS invests the majority of its corpus, at least 80% of its portfolio in equity and equity-related securities, the returns are significantly higher than any other form of 80C investment options. ELSS mutual funds are known to provide astounding returns of around 12-14% when invested for a longer duration.
Protection against market volatility
ELSS funds are often the primary point of engagement for investors looking to invest in equity-related investments. These tax-saving mutual funds act as a strong shield to withstand volatility accompanied by investing in stock markets.
Flexibility with ELSS
If you are not satisfied with your ELSS fund, then you can shift to another fund of your choice, as you are not required to stick to a multi-year deal. However, in the case of a ULIP, you can only invest in funds offered by that ULIP. Thus, these tax-saving mutual funds offer great flexibility as opposed to ULIP.
Lowest expense ratio
A scheme with a lower expense ratio is considered as a cost-effective scheme. A lower expense ratio means higher take-home income. ELSS funds enjoy the lowest expense ratio against all other 80C investments.
ELSS mutual funds are one of the best investment options, thanks to their dual benefits of tax-saving and wealth appreciation. Having said that, an investor must ensure that their investments align with their portfolio, risk tolerance, investment horizon, and other parameters. One should not invest in tax-saving investments for the sole reason of saving tax. Happy investing!