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Understanding ELSS Mutual Funds: Tax benefits and key features

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11 Sep 20246 mins readBy MOFSL

Introduction

As an investor, you might come across several financial instruments and wonder what fits into your portfolio. Every avenue has benefits as well as some limitations. The key is to understand what matters to you. Many investment schemes let you grow your wealth. But the returns you gain from such investments are subject to taxation. What if you could achieve your investment goals while saving on taxes? Equity Linked Savings Scheme (ELSS) Mutual Funds let you do that. Continue reading to learn all about them.

What are ELSS Mutual Funds?

ELSS Mutual Funds are the type of funds that invest in company stocks, also known as equities distributed across various sectors. By investing in these funds, you can participate in the growth of such companies in the stock market and earn returns accordingly. They work like equity funds but better, due to the tax benefit.

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Your investment in ELSS Funds is qualified for a tax exemption of up to Rs. 1.5 lakh annually under section 80C of the Income Tax Act, 1956. However, if the income is above the deduction amount, it is considered a long-term capital gain and taxed at 10%. You avail of this benefit by staying invested for a lock-in period of three years.

Key features of ELSS Funds

Some of the stand-out features of ELSS funds are as follows:

·   Potential for high returns

As an equity-focused fund, ELSS invests 80% of the investment in shares or other equity-related instruments. The rest goes toward fixed-income or money market securities. As equity gets exposed to higher risk in the stock market, it carries the potential of higher returns in the long term.

·   Flexible investment methods

Depending on your financial situation and comfort level, you can invest in this tax-saving scheme in two ways. You can, either invest your surplus capital as lumpsum or do it through SIP. SIP refers to a Systematic Investment Plan where you invest in smaller amounts regularly.

·   Expert assistance

When you invest in one of the best tax-saving Mutual Funds, you don't have to do it all alone. A fund manager will assist you. These are qualified professionals that ELSS funds for you. They use their expertise and market knowledge to select the stocks to invest in.

·   Diversification

With investments, concentrating all your funds in one segment is never healthy. This is why ELSS funds invest in stocks of various companies spread across diverse sectors. As a result, the risk gets distributed to offer stability in your investment.

·   No upper limit

You need not shell out a lot to enjoy the ELSS Mutual Fund tax benefits. You can start your ELSS investment with a minimum of Rs. 500. And, if you have a considerable amount, you can add more without worrying about the upper limit. You enjoy flexibility in choosing your desired sum.

Things to keep in mind before investing in ELSS Mutual Funds

Considering these factors before investing in ELSS Fund helps make an informed decision:

·   Financial goal

ELSS is a long-term saving instrument. Your funds remain locked for three years within this scheme. Hence, it is crucial to check if it fits into your investment objective. Assess what you want to achieve from it. It could range from retirement planning, and wealth accumulation, to buying a home.

·   Expense ratio

In exchange for the expertise of fund managers, you need to pay an annual percentage rate against your investment. The rate is known as the expense ratio. The lower the expense ratio, the higher the amount being invested. Thereby, higher take-home returns. Looking into this aspect helps reduce costs.

·   Risk appetite

As a higher percentage of ELSS funds are invested in the equity market, they are exposed to market fluctuations significantly. The performance of your investment is linked to market behaviour, which increases the risk. Thus, considering how much risk you can tolerate is critical before investing.

·   Fund potential

The potential of your ELSS Mutual Fund depends on various factors. Looking into them helps you make a calculated decision. You can review the fund's past performance, quality of underlying assets, relevant benchmarks, etc.

·   Fund manager's record

The fund manager's expertise and experience greatly influence the fund's performance. It is crucial to research their history and reputation. A skilled fund manager with a proven history of managing Mutual Funds successfully can navigate the fluctuating market more effectively.

Conclusion

Now that you know how ELSS Mutual Funds work, you can start saving tax on your investment while achieving your wealth growth goals. You can benefit from the flexibility, high-return earning potential, and expert management it provides. You just need to do your research, assess your goals, and understand the terms to make the right investment decision. And just like that, you can leverage the combination of equity-linked returns with tax savings.

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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