When compared to the other investment tools available under Section 80C of the Income Tax Act of 1961, investing in ELSS funds is a cost-effective strategy to reduce taxes. ELSS has the benefit of a shorter lock-in period and expert fund management, which can help you build wealth. In this article, we will go over some of the features of ELSS funds.
Why to invest in ELSS?
1. Higher Investment Returns (ROI): Since ELSS invests primarily in equity instruments, the returns are substantially higher than most tax-advantaged investment options in the long run. This accomplishes two goals: you save money on taxes while simultaneously generating significant earnings. If you want to invest in ELSS, it would be the right option if you are planning to invest for a medium to lengthy period of time. ELSS has a track record of generating around 12% over the course of ten years or longer. When compared to the PPF's meagre 8% returns, this is a huge increase. However, it is important to note that ELSS investments are subject to market risk, so there is no guarantee that they will always generate 12% returns. You can use a PPF calculator to estimate how much your investment will grow over time, so you can see how different rates of return will affect your overall returns.
2. Investing with a shorter lock-in period: The lock-in period for ELSS is shorter. Unlike PPF, NSC, and EPF, which all require a minimum of five years of lock-in, the ELSS is a far better alternative, requiring only three years of lock-in.
3. Flexibility with ELSS: It is possible that your ULIPs would earn returns that are comparable to those of an ELSS over time. A ULIP lacks the flexibility of an ELSS. Since you are not obligated to commit to a multi-year arrangement, if you are unsatisfied with your ELSS fund, you may switch to another fund. If you are unsatisfied with a fund supplied by a ULIP, you can only switch and invest in funds offered by that ULIP.
4. Protection in case of volatility: When it comes to investing in equity-linked securities, ELSS mutual funds are frequently the first port of call for investors. Many equity investors begin by investing in these funds' equity-linked products before moving on to equity mutual fund schemes. Since you cannot touch the fund during the three-year lock-in period, it helps you develop discipline. These funds also provide a solid buffer against stock market volatility. The plan profits not just from market highs, but also from market lows.
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How Can You Save Taxes Through ELSS Funds
The only type of mutual fund eligible for tax deductions under Section 80C of the Income Tax Act of 1961 is an ELSS fund, or equity-linked savings scheme. By investing in ELSS mutual funds, you can get a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 every year in taxes. You can use ELSS Calculator for your reference.
The asset allocation of ELSS mutual funds is mostly made up of equities and equity-linked instruments such as listed shares (65 percent of the portfolio). They might also be exposed to fixed-income securities. These funds have the shortest lock-in duration of all Section 80C investments, at just three years.
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