Why you should consider investing ELSS fund for tax saving and short-term financial goals

 

ELSS funds stands for Equity linked Saving Schemes or its popularly known as tax saving funds. ELSS funds are type of mutual funds where the exposure of funds is generally towards NIFTY 500. The basic idea of the fund is it can be claimed for tax saving on your taxable income under section 80C of the Income Tax Act, 1961.

Things to know about ELSS mutual funds:

1) You can claim up to 1.5 lakhs under Section 80C , so you are saving taxes as well as investing at the same time.

2) There is a lock-in period of 3 years, that is if you invest in ELSS fund on 1^st of January 2022 then you can only withdraw it after 1^st of January 2025. I would say this is for our own good as we tend to redeem funds when its underperforming.

3) The ELSS funds are subjected to market risks as the fund has major exposure towards equity, so be prepared to ride market volatility but there is higher chance of making more return in these 3 years.

4) You can make a lumpsum investment of make a SIP plan (I prefer SIP as in long run you don’t have to worry about timing the market). Also, don’t buy in lumpsum during end of the financial year and always plan tax saving well in advance that is at the beginning of the financial year.

5) Do note the taxation applied will be similar equity any other Equity mutual fund once you redeem it, but the catch here is since you are withdrawing it after 3 years only long-term Capital gain is applied, that is if the tax is applicable only if the underlying profit is more than 1 lakhs.

6) If you can set financial goals for 3 years and do continuous SIP for 3 years then you can fulfill your financial goal for next 3 years and you will be still doing your SIP and start the redeeming every year based on investment 3 years ago.

7) Finally, I would say that don’t invest in more than 1 ELSS fund at a time because its redundant and there is less diversification. For longer financial goals you can go with normal mutual funds that have better returns and more liquidity.

Some of the top ELSS funds to consider doing SIP:

•  IDFC Tax Advantage Direct Plan Growth – CAGR – 26.1% for 3 years,15.18% for 5 years
• Canara Robeco Equity Tax saver Direct Growth - CAGR – 25.4% for 3 years,17.34% for 5 years
• Mirae Asset Tax saver Fund Direct Growth - CAGR – 24.15% for 3 years,17.16% for 5 years
• Kotak Tax Saver Fund Direct Growth - CAGR – 21.19% for 3 years,14.27% for 5 years