Tax planning is an essential part of an investor’s financial strategy. The purpose of Section 80C of the Income Tax Act of 1961 is to provide a tax deduction to investors invested in various savings and investment schemes. The maximum allowable tax deduction is Rs 1,50,000 per year. Another such tax-saving path is the Equity Linked Saving Scheme (ELSS).
Best ELSS Mutual Funds– As the name suggests, equity-linked savings schemes are mutual funds based on equity. These are the only mutual funds that are counted for a tax deduction. Such mutual funds come with a lock-in period of three years, which is the shortest of all options under section 80C. You can invest in a lump sum or a systematic investment plan (SIP). It is possible for investors to invest less than Rs 500 and there is no upper limit.
Investors willing to take risks prefer ELSS funds as these investments are linked to equity. Because there is a possibility of uncertainty, investing in a lock-in period, which is three years for Best ELSS mutual funds to invest, is appropriate. Young investors should invest in the early years of their professional career with a long-term outlook. ELSS is best suited for young investors as they have time to get the full power of compounding to enjoy higher returns while saving up to Rs 46,800 per year in taxes.
Benefits of ELSS Mutual Fund-
- The three-year lock-in period is the shortest of all methods in Section 80C.
- Best ELSS mutual funds to invest have the potential to provide much higher returns than other means of tax-saving such as PPF or NPS.
- Profits are taxed only at 10% of the gains.
- There is no maximum investment limit.
- Investors are not required to have in-depth market knowledge. Mutual funds are managed by skilled fund managers with working experience to maximize the return on your investment.
ELSS Mutual Funds Disadvantages
- Like other tax saving options such as ELS EPF and PPF, ELSS is not entirely at risk. A risk profile is equivalent to any mutual fund scheme based on equity. It is just that we get income from the tax deduction.
- If the ELSS mutual fund has invested for more than five years, it has given good returns. An investor should enter equity (or ELSS) only when the holding period is more than five years, and with appropriate asset allocation.
- Many mutual funds houses will not accept investments from investors living in Canada and the United States.
Evaluate the Best ELSS Mutual Funds
Fund Returns- Before investing in that particular fund, you have to look at the fund’s recent performance for at least five years. Choose the fund that performs better in the same time frame than the benchmark and other related funds.
History of the fund- Consider fund houses that have claimed five to ten consecutive years.
Expense Ratio- The expense ratio shows how much of your money is about to manage the account. The lower expense ratio translated expenses to get higher returns home. You have to choose the fund, which has a low expense ratio.
Note: Before choosing a single fund, you should evaluate and compare different parameters of different funds. Investment also depends on financial goals, investment horizons and the risk appetite of an investor.