Most individual and professional investors opt for mutual funds to beat the market or merely to get access a variety of instruments. As a convenient option for buying stocks or bonds individually, you can invest in mutual funds as part of a defined financial plan for your future.
But as a new investor, looking to test the waters in the world of mutual funds, it can be a good idea to begin your journey with Equity Linked Savings Scheme (ELSS), or better known as mutual funds that are tax-saving investments.
Why ELSS matters?
Towards the end of the financial year, almost every professional makes last-minute Section 80C investments. And in this regard, they may choose options that could block their money for a considerable number of years. Unintended investments can negatively impact wealth-creation plans dearly. For most income-earning investors, the ₹1.5 lakh invested in Section 80C options can mean a significant portion of their annual savings.
This is why, as the answer to saving tax and growing your wealth, ELSS can make a prominent contribution to your long-term financial goals. ELSS is a mutual fund tax saver whose primary objective is to generate medium- to long-term capital appreciation.
Amongst all tax-saving options, the ELSS tax saver mutual fund instrument has the shortest lock-in period of three years that can enable your participation in the long-term growth potential of equity markets.
Here are primary reasons why ELSS can be a safe bet when beginning your journey into the world of mutual funds.
Putting returns first: As a market-linked product, ELSS can offer the best return potential on your investment. This is because of the equity factor combined with the tax-saving component.
For instance, if you invest ₹1.5 lakh in an endowment plan at a 6% annualized return for ten years, you could obtain a corpus of ₹19.8 lakh at the end of its maturity. On the other hand, if you invest in an ELSS fund with a 12% annualized return, you could gain ₹26.32 lakh at the end of 10 years, with greater flexibility and better exit terms.
Ideal for short- to medium-term goals: If you are looking at a PPF option as a tax-saving route, the 15-year-old lock-in period may help your short- to medium-term goals. If your goals are not more than five years away, ELSS mutual funds can give you decent returns, given its equity factor that can bolster your yields.
Liquidity options: Locking in ELSS funds in a three-year timeframe is the shortest lock-in period among all Section 80C options. Time-deposit post-office schemes offer a five-year lock-in, whereas traditional plans such as the 15-year PPF, EPF and NPS have early withdrawal rules and a lengthy lock-in period. So, if liquidity is a priority, you may want to pay closer attention to ELSS funds with the lowest lock-in period and early withdrawal options.
ELSS tax saving mutual funds invest in a diversified portfolio comprising equity and equity-related securities. To ensure you get your maximum bang for your buck from your ₹1.5 lakh Section 80C investment, you can count on ELSS funds to save the day.