What are Tax Saving Mutual Funds ?
Answer : Tax Saving Mutual Funds, also known as Equity Linked Savings Schemes (ELSS), are a unique type of mutual fund that offers you dual benefits:
- Tax Savings: Investments in ELSS up to Rs. 1.5 lakh per year qualify for deduction under Section 80C of the Income Tax Act, 1961. This means you can reduce your taxable income by the amount you invest in ELSS, thereby lowering your tax liability.
- Potential for Capital Growth: Like other equity mutual funds, ELSS primarily invests in the stock market. This exposes you to the potential for higher returns over the long term compared to traditional tax-saving options like Public Provident Fund (PPF) or fixed deposits.
Here are some key points to remember about ELSS:
- Lock-in period: ELSS has a mandatory lock-in period of 3 years from the date of investment. This means you cannot withdraw your money before the lock-in period ends.
- Investment horizon: ELSS is best suited for long-term investment goals (ideally 5 years or more) due to its equity-oriented nature. Stock markets can be volatile in the short term, but historically, they have provided good returns over the long term.
- Risk involved: As ELSS invests in equities, it carries inherent risk. The value of your investment can fluctuate based on market movements. However, if you have a long-term investment horizon and can handle some volatility, ELSS can be a good option for your tax-saving needs.
Here are some additional things to consider before investing in ELSS:
- Investment amount: You can invest in ELSS through lump sum payments or through Systematic Investment Plans (SIPs). SIPs allow you to invest a fixed amount at regular intervals, which can help you build your investment corpus over time and average out the cost of your investment.
- Fund selection: There are many different ELSS funds available in the market. It is important to compare different funds based on their performance, risk profile, and investment objectives before making a decision.