Tax saving mutual funds or Equity Linked Savings Schemes (ELSS) facilitate every investor to save a lot of taxation under Section 80C of the IT Act. One can invest a maximum of Rs 1.5 lakh in ELSS and claim tax deductions on their investments every year. The government of India allows tax planning under Sections 80C, 80D, and 80EE. One can claim Rs. 25,000 (50,000 for senior citizens) under Section 80D and Rs. 50,000 under Section 80EE.
As beginners are introduced to tax saving options such as PPFs, Insurance, ULIPs, and more. Other than traditional investment options, one shall consider investing in equity as an asset class with ELSS (Equity Linked Savings Scheme) with a 3-year lock-in period. ELSS carries a high risk as this Tax saving mutual funds invest in stocks. One must be aware of the said aspect, especially if one is a first-time investor in equity mutual funds. Compared to the usual investments like Public Provident Fund, ELSSs do not offer guaranteed returns.
There are a few things one should keep in mind while investing in ELSS. Always link ELSS investments to a long-term goal. This will help you in focusing on your goals rather than worrying about the performance of the stock market. Though these schemes come with a mandatory lock-in period of three years, you should always invest in them with a horizon of at least five to seven years. There is no need to sell your investments on completion of the mandatory lock-in period. One may continue to hold the scheme if it is performing well.
Firstly, these schemes have the potential to supply higher returns. As one recognizes, these schemes invest in stocks, and following, these stocks typically offer higher returns over a long period of time. On average, the ELSS category offers a mean return of around 16% over 10 years.
Secondly, ELSS has the shortest lock-in period. Most other investment options under the 80C basket are government-backed investments. They are typically inclusive of longer lock-in periods. If one wishes to access their money in three years, one can invest in ELSS. But don’t judge it to reward great returns in three years. One must always detain mind that equity investing is for the future. Thirdly and the most vital thing to remember is that ELSS is an excellent stepping stone for various investors. They often start with ELSS and also the mandatory lock-in period of three years within the schemes helps them to weather the volatility in the security market. Once these investors see the rewards in, say, five or seven years, they begin investing added cash in equity schemes. MyFinopedia steps forwards to support you as a beginner in the investing world.