Mutual Funds are a form of investment wherein investors with similar financial objectives invest the money in equities, bonds, Government securities or money market instruments as per the scheme objective. It is a pool of money from various investors which is professionally managed, invested in diverse assets and is available for investments by all sorts of investors.
Further, there are largely 3 category of mutual funds for investors to choose from – Equity fund, debt funds and hybrid funds. In case of equity mutual funds, one is advised to invest for the long term of minimum 5 years or even more, in order to move towards meeting financial goals.
Equity mutual funds, invests primarily in stocks. Equity funds are one of the best investment options if you have a long-term goal in mind. Since the stock market is volatile, fluctuations can only be countered by maintaining long-term investments. This gives the investor advantage of rupee cost averaging of unit prices, particularly if they are investing via SIPs. On the other hand, debt mutual funds are those which are used for short term investing such as a few days, months or for few years.
ELSS Funds
A popular kind of equity fund category is ELSS. Also known as equity linked savings schemes, these equity mutual funds are open ended diversified funds which have a lock in period of 3 years. ELSS offer tax benefits under Section 80C of the Income Tax Act, 1961. An important point to note here is that an investor is allowed to get a maximum deduction of up to Rs 1.50 Lakhs in a year on the total investments which qualify for Section 80C under The Income Tax Act, 1961. The premiums paid for life insurance policies, tax saving FDs, investments in PPF and NSC are some of the options which qualify for tax saving under Section 80C.
Let us understand how ELSS funds help investors in saving taxes. These schemes invest majority of their portfolio in stocks which means that the investor is not only investing in stocks, without undertaking any direct risks, but also saving taxes. Additionally, ELSS offers superior returns to its investors, as compared to other tax saving instruments, due to the power of compounding. This simply means that when one is invested in the scheme for a long time, they get return not only on the principal amount, but also on the returns generated from the principal amount.
ELSS funds provide the most tax efficient returns. From April 1, 2018 onwards capital gains of up to Rs 1 lakh in a year in ELSS equity fund will continue to be tax free. Capital gains in excess of Rs 1 lakh will be taxed at 10% only.
Investors need to take care and also understand that risk free investments are not entirely free from the risk of inflation. If the risk free or assured returns post tax are lower than that of inflation, then by making an investment in risk free or assured return investments, one is actually destroying savings and not creating wealth out of it. ELSS has the ability to avoid this by beating inflation and creating wealth for the investors in the long run.
Equity mutual funds are a popular way of investing one’s savings in the market, while enjoying professional management as well as financial advice. If you want to save taxes, ELSS is your go to equity fund scheme.
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