- What is an ELSS mutual fund scheme?
- Benefits of investing in an ELSS scheme
- Conclusion
- What is an ELSS mutual fund scheme?
The Income Tax Act allows deduction from income for investments made in equity funds with certain conditions. Mutual funds launched in order to claim this benefit are known as Equity Linked Savings Schemes. These are primarily diversified equity funds that offer tax benefits to investors under section 80C of the Income Tax Act up to an investment limit of Rs. 150,000 a year. The investment is subject to lock-in for a period of 3 years during which it cannot be redeemed, transferred or pledged once tax benefit is claimed in respect of such investment.
- Benefits of Investing in an ELSS mutual fund scheme
a. Advantages over other tax reduction schemes
Besides ELSS, other modes of saving tax via Section 80C of Income Tax are investing Public Provident Fund (PPF), National Savings Certificate (NSC) and Bank Deposits.
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ELSS allows an investor to invest in equity asset class and still get the benefits of tax reduction. The investment tenure is shorter at 3 years and also offers the potential of returns linked to market returns.
b. Advantages over other equity schemes
The biggest advantage of ELSS is that investors have a lock-in period of 3-years to claim tax reduction, which allows the fund manager to enhance the performance of the fund without the risk of large scale redemption in a bear market.
An ELSS is usually a multi-cap mutual fund, which allows the fund manager a flexible investment strategy compared to large-cap, mid-cap and small-cap funds.
Below are returns of some of the ELSS schemes compared to other funds of the same AMC:
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3. Conclusion
Tax saving is one aspect of ELSS investments. Wealth creation should be an equally important objective when selecting an ELSS scheme. The key is to remain invested for a longer time horizon. It would be advisable to consult your independent financial advisor to seek the best course of action.