Equity Linked Savings Scheme or ELSS funds are preferred investment options among most investors. It combines wealth creation and tax saving, which makes it a remarkable value addition for a balanced portfolio.
Many mutual fund experts suggest an ELSS fund as an ideal choice for a new investor looking to invest in mutual funds. Besides, ELSS can offer the flexibility to investing via a lump sum or Systematic Investment Plans. However, some investors have a few regarding these tax-saving instruments.
The article busts the four commonly-held myths surrounding ELSS tax saving funds.
Misconceptions about ELSS funds
Ideal only as a tax saver
Investors get drawn to ELSS because of their tax-saving nature. However, there is more to tax-saving investments than enjoying an ELSS tax exemption up to Rs.1.5 lakh. Similar to other equity fund mutual schemes, ELSS funds can also be used to achieve long-term financial objectives. As these funds invest their corpus in equity, most of them follow a multi-cap strategy. Thus, over the long-run, they can generate returns as high as multi-cap funds.
Redeem funds immediately after the lock-in period
ELSS funds have the shortest lock-in period of three years compared to other Section 80C investment instruments. Given this option, most investors sell the fund units on completion of the lock-in period. But it can be wise to hold on to the ELSS investment for an extended period. If the fund is performing well, you can continue reinvesting for better yields.
Invest in the same ELSS
Some investors believe that to get a tax rebate under Section 80C they must continue investing in the same ELSS fund. However, this is not true. To claim a tax deduction, you can invest in any ELSS fund. You can change or even invest in multiple schemes to make a tax claim. It is not mandatory to stay invested in the same scheme year on year.
Recycle or use up ELSS funds on maturity
Some investment experts suggest reinvesting in the same ELSS mutual fund investments after the lock-in period ends. They assume this strategy can help save tax without making additional investments. However, this strategy can fail as some investors may stop investing on receiving a lump sum amount on completing the lock-in period. The lump-sum amount may get spent on purchases, thus defeating the purpose of achieving the financial goal or wealth creation.
Conclusion
If you are a new investor faced with a dilemma of choosing ELSS v/s mutual funds, you can consider investing in ELSS. You get the opportunity of delving into equities, thus helping you move to high-risk high-return equity schemes based on your investment profile. Plus, you can also enjoy the ELSS tax benefit under Section 80C up to Rs.1.5 lakh.