Several mutual fund managers and experts believe that ELSS or Equity Linked Saving Schemes or are the one of the best investment options for investors new to the investing world to get their hands in the stock market.
If you are wondering what are ELSS funds, they are simply a type of mutual fund that invest a majority of their corpus in equity and equity-related securities. Investors investing in ELSS funds can avail a tax deduction of up to Rs 1.5 lac under Section 80C of the Income Tax Act, 1961. Thus, these funds are rightly known as ELSS tax saving mutual funds. As an investor, you can save up to Rs 46,800 p.a. by investing in these ELSS tax saving funds, given that you belong to the highest tax bracket.
These funds provide the dual benefits of wealth creation and tax saving opportunities to investors. ELSS funds also happen to have the shortest lock-in duration as opposed to other 80C investments. Thus, it is no wonder that mutual fund experts and fund managers prefer these funds over other Section 80C investments.
Experts have grave faith in the mandatory lock-in period of three years that are accompanied by ELSS funds will aid in preparing the investors to face the volatility associated with equity markets. However, a word of caution.
Though ELSS funds have a mandatory lock-in period of just 3 years, it is advised to invest in equity markets, including ELSS mutual funds, only if you you can invest for a minimum duration of five to seven years. It is tremendously important given the current uncertain and unpredictable market conditions. Why, you may ask? It is not very clever to take a lot risk when you are investing for a short-term, say for a horizon of 3 to 5 years.
If your investment horizon is short, you might consider sticking to safer investment options such as five-year bank safe deposits.
As for investing a lumpsum amount in ELSS, the strategy is implemented to dodge catching the market at a specific level. This does not mean that you must not invest in equity schemes unless you can invest via a Systematic Investment Plan (SIP) for a long period.
You can even divide your lumpsum amount and invest the capital in three to four instalments before the tax deadline to claim the tax benefit under Section 80C in that particular financial year.
It is not easy to envisage the market. History is a proof that stock markets have the capability to provide more significant returns than any other asset classes when invested for a long period. What’s more, it has the potential to generate inflation-beating returns.
This is why investors often suggest linking your ELSS investments with your long-term financial goals such as retirement planning, or funding your child’s higher education etc. Happy investing!