Tax saving mutual funds offer an efficient way of saving taxes in comparison to other popular investment options under Section 80C of the Income Tax Act. Equity Linked Saving Scheme or ELSS has a short lock-in duration and is managed by professional managers. Let us look at how investing in ELSS or Equity Linked Saving Schemes can prove to be quite helpful.
- Shorter Lock-in Investment Tenure – Unlike the National Savings Certificate, Public Provident Fund or Employee’s Provident Fund, ELSS has a shorter lock-in period. While the others may have a minimum lock-in period of 5 years, you need to make commitments of only three years with the ELSS. These mutual funds under 80C can be a boon for your investment.
- Higher Returns on Investment – Since the investments in ELSS funds are made in equity markets, the returns are higher than most of the investment options that have tax-saving benefits. These have dual purposes – not only do you save taxes but get higher returns rates as well. These funds offer excellent choices to those who are willing to invest for a medium to long duration. According to empirical evidence, ELSS generates about 12% returns. You can use a tax savings calculator for better understanding.
- Flexibility with ELSS – Though ULIPs, which are sold by the insurance firms, might have similar returns; they do not offer the flexibility of ELSS. With a tax savings SIP, you will find that there are further advantages to the arrangement. The portfolio is well-diversified with a mixture of equity and debt. Also, you will be safely backed by government-backed securities and a good growth rate through equities.
- Protection during volatility – ELSS is often one of the first points where investors start to engage in mutual funds. Many people start with these funds and then move on to the equity markets. This fund helps you build discipline because you cannot draw the investment out for three years. These funds also act as a strong shield to protect you from the volatility of the market. These schemes not only provide high returns on investment but also save you from the unnecessary lows. If you are thinking about how to save income tax, this is one of the best options available for you.
- Advantage of combining ELSS with PPF – Another advantage of ELSS over its counterparts is that it can be coupled with PPF for significant benefits. This combination is amazing as it would help by offering the stability of PPF and the earning potential of the ELSS. There are further advantages too. The portfolio would be well-balanced with a mix of equity and debt.
These are some of the reasons why you should start investing in tax saving mutual funds in your investment portfolio. They will save you on your taxes and get your good returns through disciplined investments.