ELSS: Is ELSS really a good choice for saving tax?
In recent years, it can be seen that many taxpayers have turned to ELSS systems for tax benefits. In this article, we’ll cover the different aspects of tax-saving ELSS or stock-linked mutual fund savings plans.
ELSS funds are equity linked funds that invest a large part of their corpus in equities or equity linked instruments. They are also called tax saving schemes because they provide tax exemption on your annual taxable income under Section 80C of the Income Tax Act.
Most ELSS funds invest in a diverse group of companies ranging from small caps to large caps across all industries. This allows an element of diversification to be added to the investment portfolio. In addition, ELSS schemes have a mandatory blocking period of three years. Thus, any investment made in ELSS funds will be blocked for three years and investors will only be able to redeem their units once the block has been completed.
ELSS funds are subject to the inherent volatility of the equity market, but have the potential to generate superior returns over the long term. The risk of volatility can be mitigated by investing in ELSS via SIP mode. Although you can invest a lump sum in an ELSS system, most investors prefer the SIP mode because it allows them to invest small amounts and enjoy tax benefits as well as the opportunity to build wealth.
If your goal is to build wealth by investing in ELSS funds, selecting the right plan is key. Investors should make their selection based on the consistent performance of a program over the long term.
Make sure there is good diversification between market caps and industries. Before making a decision on which instrument to use for your tax savings, make sure you have set your financial goals and invest accordingly.