ELSS is a mutual fund that gives tax benefits under Section 80C of the Indian IT act, while its investment risks are mainly invested in equities. The lock-in period is only 3 years as well as it has the capacity of wealth creation hence it is suitable for investors who intend to avail tax deductions. However, using a sip calculator online would be a great choice. Now, let’s see why it is wise to invest in ELSS funds, 5 reasons that are hard to ignore.
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Tax Benefits Under Section 80C
The primary advantage that one gets from ELSS funds is the tax benefits that are offered under section 80C of the Income Tax Act, 1961. ELSS funds allow citizens of India to invest up to Rs. 1. 5 lakhs annually to reduce tax amount that is payable. This leads to significant savings for taxation, along with a greatly beneficial factor for the investors with high tax brackets. Thus, ELSS funds are a good option if you have not used up your Rs. 150,000 limit available under Section 80C of the Income Tax Act.
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Potential for Higher Returns Through Equity Exposure
While compared to other tax saving instruments and fixed income funds, ELSS have mandatory equity exposure where at least 80% of the fund corpus is invested in shares and other related instruments. This puts your investment in the position where it can benefit from the wealth creation capabilities of equities in the long term and which over a longer term have delivered returns of between 12 to 15% per annum above inflation. Thus, ELSS has the twin benefit of tax savings apart from the return element in terms of capital appreciation.
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Relatively Short Lock-in Period
As for the lock-in period, ELSS funds are the most flexible as they can be locked for the shortest period of 3 years among all Section 80C investments. There are other instruments such as PPF, NSC, etc., which have longer lock-in periods varying between 5 to 15 years. This shorter lock-in period is some advantage to the investors since it allows for the adjustments of the investments once certain life goals have been met or when there is a need to balance the portfolio. Further, the historical returns indicate that equities have provided sensible returns over any 3-Year rolling period, which makes ELSS a suitable product for short to medium-term goals.
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Professional Management for New Equity Investors
It is a perfect opportunity for those investors who do not want to invest directly in stocks or directly participate in the equity markets but they want to invest in a mutual fund scheme which is eligible for 80C deductions. They are more transparent, liquid and have professional fund managers in comparison to direct stocks. Hence, first timers in stocks have a lot to benefit from the management of investors’ money by professionals through ELSS funds.
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Long-Term Wealth Creation Through Compounding
In looking at the history over the very long investment horizon of 7-10 years, equities have been outstanding means of generating wealth. Therefore, smart investors use ELSS to increase their equity portfolio and thereby tap into compounding. Consistent investment for many years in ELSS funds helps to build a decent retirement sum along with having tax exemptions and equity holding.
Conclusion
The suitability of ELSS mutual funds can be summarized with the notion that they provide an excellent opportunity for retail investors who seek to save taxes under the current income tax laws while attempting to secure their future wealth through equity investments. Given the overall advantages, any investor who wants to avail the current tax planning opportunities should use a part of Section 80C investment in ELSS funds. Choose those schemes which have demonstrated continuity of the approach of leveraging on the principle of compound over long periods of time.
