Why Should You Invest in Tax-Saving Mutual Funds?

Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds that assist investors in long-term outpacing inflation growth. This tax-saving plan uses an equity mutual fund with a three-year lock-in and an income tax benefit under Section 80C of the Income Tax Act. Like any other equity mutual fund, an investor can invest in ELSS through SIP with a minimum monthly instalment of Rs. 500.

The following are a few reasons why you should invest in tax-saving mutual funds:

  • Creates Wealth: ELSS are usually the highest performing 80C investments in the long run. These schemes are diverse funds that invest in equities and equity-related securities. While ELSS investments are susceptible to market risks, historical data demonstrates that equities are the highest-performing asset type over the long term.
  • Saves Tax: Investors can profit from tax savings through tax-saving mutual funds. Under Section 80C of the Tax laws of 1961, investors may seek a tax exemption on their investments up to Rs. 1.5 lakh for the financial year. Additionally, there are no limits on the amount invested in them. The exemption, however, does not apply to sums greater than Rs. 1.5 lakh.
  • High Liquidity: The lock-in period for tax-saving mutual funds is three years. Compared to other investments eligible for tax benefits under Section 80C of the Income Tax Act of 1961, the lock-in period for ELSS mutual funds is the shortest. Furthermore, withdrawals from tax-saving funds can be made in whole or partly after the lock-in period. The lock-in period also reduces the volatility linked to equity investments.
  • Offers Flexibility: ELSS allows investors to invest easily through SIP mode, in which you can make tax-saving investments of a fixed amount each month. SIP not only assists investors in maintaining discipline, but it also has the potential to increase returns due to rupee cost averaging. In contrast to PPF or life insurance plans, ELSS SIPs do not impose fines or suspend policies when payments are late. 

However, your SIP gets cancelled, and you need to submit a new application to restart your SIP if you miss three continuous SIP instalments because there aren’t enough funds in your bank.

  • Ensures Safety: Like all mutual funds, ELSS routinely discloses all information about the plan. Investors can periodically monitor the mutual fund portfolio’s performance and market value. Qualified fund managers manage ELSS funds. As a result, even someone with little or no knowledge of the market can invest in the top funds. This type of expert management assists investors in maximising their returns.

Investors who wish to invest for the long term while also saving taxes will benefit most from ELSS funds. Besides, young investors just starting their careers might invest in these funds to profit from stocks and long-term investment goals.