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The world of mutual funds offers a plethora of choices to investors, each catering to different financial goals and risk appetites. Among the various types of mutual funds available, Equity Linked Savings Schemes (ELSS) have gained popularity. If you’re new to mutual funds and wondering why ELSS funds are so often recommended, here’s a comprehensive guide to help you understand their benefits.
1. Tax savings
One of the primary attractions of ELSS mutual funds is the tax benefit this type of fund provides. Under Section 80C of the Income Tax Act 1961, the amount invested in ELSS can be claimed as a deduction from your total income, up to a limit of Rs 1.5 lakh per annum. This effectively reduces your taxable income and, consequently, the tax you owe.
2. Higher returns potential
ELSS funds primarily invest in the equity market, which has historically delivered better returns compared to fixed-income securities over the long term. While there are risks associated with market volatility, the potential for high returns makes them an attractive option for those looking to build wealth over time.
3. Shortest lock-in period
Among tax-saving investment options available under Section 80C, ELSS funds have the shortest lock-in period of just three years. This comparatively short period ensures that your money isn’t tied up for too long, giving you more flexibility in your investment decisions.
4. Compounded growth
Mutual funds, including ELSS, benefit from the power of compounding. When you earn returns on your investment, those returns get reinvested, leading to potentially greater returns in the future. Over the long term, this can result in significant wealth accumulation.
5. Diversification
ELSS funds invest in a diversified portfolio of stocks, spreading the investment across different sectors and companies. This diversification helps in mitigating the risks associated with equity investments. For inexperienced investors, this automatic diversification is a boon, as it reduces the need to individually analyse and select stocks.
6. Flexibility
Investors have the choice of making a lump sum investment or opting for a Systematic Investment Plan (SIP). SIPs allow you to invest a fixed amount regularly, ensuring discipline in your investment strategy and benefiting from market fluctuations through rupee-cost averaging.
7. Professional management
ELSS funds are managed by professional fund managers who have the expertise and resources to analyse market data, trends, and companies. Their experience helps in selecting the right investment opportunities, making it easier for individuals who lack the time or expertise to manage their portfolios actively.
8. Ease of investment
With the advent of digital platforms and financial technology, investing in ELSS funds has become incredibly simple. One can start investing with minimal paperwork and monitor their portfolio’s performance online in real-time.
To wrap up
ELSS mutual funds are a compelling investment option, especially for those new to mutual funds. They not only offer the dual advantage of potential wealth growth and tax savings but also come with the security of professional management and the benefits of diversification. Like all investments, it’s essential to research and choose a fund that aligns with your financial goals and risk appetite. If you’re looking for a tax-efficient avenue with the potential for higher returns, ELSS mutual funds are worth considering.
