Saving tax is one of the prime goals of every taxpayer and the Equity Linked Saving Schemes, or the ELSS mutual fund is one of the ways to do it. There are two types of ELSS – Growth Funds and Dividend Funds. The main motive of growth funds is to give you some handsome returns on long-term investment. On the other hand, dividend funds will yield you cash on a regular basis. But there are some things that you must know before you invest in ELSS to make the most out of them.
Exposure to Equity
Investment in equity is often considered risky due to the market volatility factor, but if you are a newbie investor, then ELSS mutual fund is a good way to start with. The professional fund managers are responsible for the managing of these funds. This is one of the advantages because you do not have to take the hassle of many aspects due to the presence of fund managers. Your SIP can be as low as Rs 500, and you can still enjoy a diversified portfolio.
The lock-in period of an equity investment is the time period during which you cannot redeem the money. For ELSS investment the lock-in period is that of three years, and it is the least compared to the other types of tax-saving investments. But it is always advisable to keep the money invested for a minimum of five years to gain more returns from these funds.
Tax Exemption Limit
The Section 80C as stated under the Income Tax Act, 1961 has several measures listed for Tax Deductions. Among these investments, ELSS is also present. But there is a limit to the amount of tax deduction, and that is Rs 1.5 lakh. Suppose you have an insurance policy and have made other investments which are already amounting to Rs 1.5 lakh tax deduction then you do not need to raise the investment amount for ELSS unnecessarily because you will not get any extra deduction for that.
It is a known fact that when invested for a long duration of time, the ELSS funds can generate some handsome returns. But you cannot expect for something unrealistic. And the greater fact is that the guarantee of getting handsome returns is not always stable. The performance of every fund keeps varying. Higher returns can obviously be expected for a longer investment time, but that expectation should remain within a limit.
Many investors are not aware of the fact that ELSS funds can no doubt give some high returns but with it comes the high risk-taking factor. The Net Asset Value or NAV has some great deal of fluctuations. However, do not back up just because there are risks because, in the long run, ELSS gives some genuine returns and saves tax. All you have to do is thorough research.
Plan before investing and keep these five things in mind. With a goal-oriented approach, you will not only save some tax but also make some good investments.