We all have high hopes for 2021 and it can all go right for us financially with the help of Mutual Funds! Let's begin by approaching the tax season, the right way and there's no better option to save your taxes than an Equity Linked Savings Scheme (ELSS).
First, let's start by answering the question - What is a Mutual Fund? A Mutual Fund is defined as, "an investment programme funded by shareholders that trades in diversified holdings and is professionally managed." In simpler words, Mutual Funds are a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. All the investors share a common objective of earning returns and each of them owns units, which represent a portion of the holdings of the fund. Later, the income/gains generated from this collective investment is distributed proportionately.
What is an ELSS Mutual Fund? When it comes to tax-saving Mutual Funds, ELSS is trusted by many investors. As the name suggests, an ELSS fund is an equity-oriented scheme, hence it maintains a portfolio largely in the stocks.
How does ELSS work? ELSS allows an individual or HUF, a deduction from the total income up to ₹1.5 Lakhs under Sec 80C of the Income Tax Act 1961. They have a lock-in period of 3 years which means that one cannot sell the units for 3 years from the date of purchase. But they have the shortest lock-in period among all the 80C options with the potential of good returns. However, there is no maximum tenure of investment.
Why is ELSS considered as the best tax-saving option? The reason why ELSS is considered as one of the best tax-saving Mutual Funds is because of its dual benefits. ELSS not only helps with tax deductions but it also has a good scope for wealth accumulation.
One can also start investing in these with an amount as low as ₹500 through a Systematic Investment Plan (SIP). So, one can invest in ELSS without the need of accumulating a corpus.
ELSS also helps in reducing risk by diversifying their investment across various sectors, from small-cap to large-cap. Hence, investing in ELSS can help you in diversifying your portfolio as well.
Plan your ELSS investment
"Good fortune is what happens when opportunity meets with planning." - Thomas Edison This quote rings true, even in the case of ELSS investments. Many investors rush with their decision of tax-saving by investing during the last hour. As a result, they end up investing in lumpsum which can turn out to be risky if the market is high. On the other hand, investing through a SIP can help them average their buying cost per unit. Hence, it is always recommended to begin an ELSS investment with the help of proper planning.
An investor should be patient while investing in an ELSS scheme. This investment should be viewed as a long-term financial goal primarily because of 2 reasons - a lock-in period of 3 years and a stabilization period of 5-7 years. Thus, one must stay put and stay invested for a longer time for a better chance of good returns.
What is an ELSS Mutual Fund?
When it comes to tax-saving Mutual Funds, ELSS is trusted by many investors. As the name suggests, an ELSS fund is an equity-oriented scheme, hence it maintains a portfolio largely in the stocks.