A misunderstanding that people generally have is that an investment in mutual funds is carried out with only one purpose. The said supposed purpose being accumulate long-term wealth by signing up for a mutual fund scheme. But that might not be the case. Some might be looking for an investment scheme that comes with tax benefits. While you may think that it is highly unlikely that a mutual fund scheme might not help you with taxes, the fact is that there is a type of mutual fund that can do exactly that. The said variant of mutual fund scheme is equity-linked savings saving scheme or ELSS.
What is an equity-linked savings scheme?
ELSS schemes are known for investing in equities and their related instruments. While most of the time, these schemes are known amongst investors for helping them with like long-term wealth accumulation and beating inflation, they also come with tax-saving facilities.
These schemes which are known for coming with a lock-in period of three years are one of the different variants of equity mutual funds. You can enjoy tax benefits with ELSS schemes under Section 80C of The Indian Income Tax Act, 1961. Just like is the case for mutual fund schemes in general, it is possible for you to invest in ELSS through the SIP mode of investment.
How do these schemes work?
A salient feature of equity-linked savings schemes (ELSS) is that you can claim a tax rebate of nearly ₹1,50,000 by investing in them. As stated before, the fund allocation in ELSS is mostly made towards equity-linked securities and equities. Hence, in case it happens that you have opted to allocate funds to ELSS, you can invest in things like listed shares.
Apart from listed shares, a small exposure to fixed-income securities might also be involved in these schemes. However, before signing up for the ELSS scheme, you need to make note of one fact. The said fact being ELSS funds come with a lock-in period of just three years.
What are the reasons to consider signing up for ELSS funds?
Here are some of the reasons why you should consider signing up for ELSS funds:
- They come with tax advantages:
Tax benefits are one of the big reasons why numerous investors are known for signing up for these schemes. By opting to sign up for ELSS, you get a chance to enjoy a tax deduction of nearly ₹1,50,000 every year. It is possible to enjoy the said facility can be enjoyed thanks to Section 80C. The said provision is a part of the Indian Income Tax Act, 1961. If it is a tax-efficient scheme that you are seeking, equity-linked saving schemes might be an ideal solution.
- These schemes come with the shortest lock-in period among Section 80C investments:
As stated before, equity-linked savings schemes are known for coming with a lock-in period of three years. Unlike other investment schemes falling under the category of Section 80C investment options, three years is supposedly the shortest duration.
- There are two different investment modes available as an option:
Another misconception amongst people is that for investing in mutual funds, one is required to make a one-time lump-sum investment. However, it is possible for you to opt for a less financially stressful investment mode in case you don’t have the required investment amount at your disposal. The less stressful investment mode is systematic investment plans or SIPs. With the help of this mode, you can make monthly investments in ELSS.
- Your funds are exposed to equities:
In accordance with the name equity-linked savings schemes, these funds are known for investing in equities. Signing up for equity-linked savings schemes is regarded to be a good way to expose your funds to the equity market. Signing up for ELSS is regarded by many to be the first step in building equity as an asset class in your portfolio.
In case you are searching for an investment scheme that offers tax benefits, ELSS might be an ideal solution. However, taxes should not be the only reason why you should sign up for this mutual fund scheme. They offer other benefits too.