In recent years, it can be seen that many taxpayers have turned to ELSS schemes to avail of tax benefits. In this article, we will discuss different aspects of tax-saving ELSS or equity-linked savings schemes of mutual funds.
ELSS funds are equity-linked funds that invest a major portion of their corpus into equity or equity-related instruments. They are also called tax-saving schemes since they offer tax exemption from your annual taxable income under Section 80C of the Income-Tax Act.
Most ELSS funds invest across a diverse group of companies ranging from smallcaps to largecaps from across sectors. This allows one to add an element of diversification to the investment portfolio. Also, ELSS schemes have a mandatory lock-in period of three years. So, any investment made in ELSS funds will be locked for three years and investors can redeem their units only after the lock-in gets over.
ELSS funds are prone to the inherent volatility of the equity market, but have the potential to generate superior returns in the long term. The volatility risk can be mitigated by investing in ELSSes through the SIP mode. While you can invest a lumpsum amount in an ELSS scheme, most investors prefer the SIP mode as it allows them to invest in small amounts and avail tax benefits along with the opportunity to create wealth.
If your aim is to create wealth by investing in ELSS funds, the selection of the right scheme holds the key. Investors should make the selection based on a scheme’s consistent performance over the long term.
Make sure there is proper diversification across marketcaps and industries. Before you make a decision on which instrument to use for your tax saving, make sure you have outlined your financial goals and invest accordingly.