If you are well-aware of the financial sector, have goals to fulfil in life and have plans to save and grow your money, you must have read or heard about investments. While many factors have helped increase awareness about the value of investments in India, mutual funds have played a defining role. They have done so by demonstrating the power of compounding, which has pushed people to make plans to increase their wealth.
Many people have also been attracted to the tax efficiency of particular types of mutual funds. Saving tax is vital for many investors in India, making mutual funds an automatic investment choice.
BREAKING AWAY FROM STEREOTYPES
Historically, mutual funds are not the first thing that comes to mind when investors think about tax-saving investment tools. Long-term wealth creation, capital appreciation, and chances of decent returns are the standout reasons investors choose mutual funds. However, tax-saving mutual funds have revealed another crucial and helpful side to the asset class in the past few years.
Saving tax with mutual funds is real and effective. Tax-saving mutual funds have proven their worth recently, helping investors save tax by breaking away from stereotypes that demand investments in traditional investment instruments solely for tax benefits.
WHAT ARE ELSS TAX SAVINGS FUNDS?
Equity-linked Savings Scheme (ELSS) is the only mutual fund that offers tax benefits. ELSS can help investors claim a tax deduction of up to ₹1,50,000 from their gross income under Section 80C of the Income Act, 1961. This accounts for significant savings and is the standout reason for the rising popularity of ELSS Funds.
However, investors need to know how it works before investing in an ELSS fund. Around 80% of the money invested in an ELSS fund is reserved for buying and selling equities and equity-related instruments.
Some of the other vital benefits of ELSS include:
ELSS funds, like every other type of mutual fund, offer flexibility. Investors can increase or decrease their investment amount whenever they feel the need. They can start from as low as ₹500 and increase it in proportion to their income. They can also invest using either the SIP route or a lump-sum amount.
• Shortest lock-in period
Traditional investment instruments have a more extended lock-in period. In comparison, ELSS funds come with a short, 3-year lock-in period. Investors can redeem their investment in ELSS funds three years from when the amount is invested. ELSS funds have the shortest lock-in period among all the investment instruments eligible for tax deduction under Section 80C of the Income Tax Act, 1961.
• Ability to create wealth
ELSS funds use compounding to multiply investors’ wealth. Investing steadily in ELSS promotes capital building, resulting in wealth creation through compounding.
CONCLUSION Mutual fund schemes are multi-dimensional. They have their advantages and USPs, making the asset class a genuinely unique proposition for investors. Among them, ELSS tax-saving mutual funds can be perfect for investors chasing tax benefits, equity exposure, and decent returns.
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