What is ELSS Mutual Funds and How Does it Help in Saving Tax?

Mutual Fund investments have seen significant growth in their portfolio in recent times. There are many factors that contribute towards their growth and here we are going to read about those factors in detail.

First, let's start by answering the most basic question - what are Mutual Funds?A Mutual Fund is defined as, "an investment programme funded by shareholders that trades in diversified holdings and is professionally managed." In simpler words, Mutual Funds are a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. All the investors share a common objective of earning returns and each of them owns units, which represent a portion of the holdings of the fund. Later, the income/gains generated from this collective investment are distributed proportionately.

Now, let’s talk about a tax saving Mutual Fund that is much talked about – ELSS Funds

What is an ELSS Fund?Equity Linked Savings Scheme or an ELSS investment allows an individual or HUF a deduction from the total income of up to Rs. 1.5 lacs under Sec 80C of the Income Tax Act.

You can invest in ELSS through Systematic Investment Plans (SIP). Hence, one need not accumulate a corpus to invest. However, if you are investing in ELSS when the financial-year end approaches, you can invest in lump sum. It is important to note that ELSS Funds have a lock-in period of 3 years which means that you cannot withdraw your money for 3 years. This is the shortest lock-in period under section 80c. Also, on redeeming the units after the lock-in, you receive long-term capital gains or LTCG. These gains are not taxable up to Rs. 1 lakh in a financial year. Any LTCG above this limit is taxed at 10% of the gains exceeding Rs. 1 lakh without indexation.

As the name suggests, this scheme invests 80% of the corpus in Equity or Equity-linked schemes. Therefore, you must stay invested for a long time for a chance at better returns. This is how ELSS offers dual benefits of tax saving and wealth creation over a long time!

Why should you invest in ELSS?It is very easy to invest in ELSS since the funds are handpicked by experts. Moreover, one can start their ELSS investment with an amount as low as Rs. 500.

You can start as well as track their investment online. You can also invest online on the portal of a respective Asset Management Company (AMC).

Investing in ELSS adds the element of diversification to your portfolio since it invests across various sectors and across a diverse group of companies ranging from small-cap to large-cap.

As mentioned above, you can invest in ELSS via SIP and in a lump sum as well. But you can benefit by investing in ELSS via SIP through rupee-cost averaging where an investor averages out the cost at which he/she buy units of a Mutual Fund. This also helps in reducing the market's volatility.

An investor should be patient while investing in an ELSS scheme. This investment should be viewed as a long-term financial goal primarily because of 2 reasons - a lock-in period of 3 years and a stabilization period of 5-7 years. Thus, one must stay put and stay invested for a longer time for a better chance of good returns.

To understand how #ELSS funds can help you with an "epic save" for your tax, you can watch Mutual Funds Sahi Hai’s campaign - #KitnaBacha, video.