Monday, January 30, 2023

Tax Saving Mutual Funds: Things to Know Before Investing

Equity Linked Savings Schemes, also known as tax-saving funds, are mutual fund investment plans that enable income tax reduction. According to section 80c of the Income Tax Act, taxpayers may invest up to INR 1.5 lakh in particular securities and deduct that amount from their taxable income. Here are some other things that you should know before investing in ELSS:

● Lock-In Period: There is a required lock-in period for most investments that qualify
for tax benefits under Section 80C of the Income Tax Act of 1961. The shortest lock-
in period among the other investments covered by the section is three years for ELSS
funds. As a result, you cannot redeem ELSS fund units before the three-year mark.
This contributes to compounded returns. Other Section 80C investments, such as PPF, have a 15-year lock-in period, while NSC has a five-year lock-in period. Therefore, ELSS funds with the least lock-in and the potential to produce market-linked returns merit consideration for integration into your tax-saving investment portfolio.

● Risk Potential: Whatever amount you invest, it is critical to understand that because
ELSS mutual funds only invest in company equity stocks, they are subject to a higher
risk of fluctuation in their Net Asset Value than other tax-saving alternatives. One
way to mitigate this risk is to invest for a longer period through SIPs and with a well-
diversified portfolio.

By overcoming short-term market volatility, equity funds have a reputation for
producing above-average returns over the long term.

● Tax-Exemption: The amount of tax deduction you can claim for investing in ELSS
funds is limited. No matter your investment, the annual maximum tax deduction is Rs.
1.5 lakhs. Remember that other tax-saving investment options covered by Section
80C of the Income Tax Act are also included in this Rs. 1.5 lakh deduction.
For example, if you have a PPF investment of one lakh, the exemption on your ELSS
funds is only Rs.50,000. You must remember to account for this when figuring out
your post-tax gains.

● Equity Exposure: If you are a beginner, ELSS funds could be your first step toward
investing in stocks. When you invest via the SIP mode, where a set amount of money
will be invested toward your preferred ELSS fund every month, you get the benefit of
professional fund management and a well-diversified portfolio for a low investment
amount.

● Doubtful Returns: While ELSS funds are believed to generate higher returns than
more conventional investment options, they are still subject to market risk and cannot
ensure a profit. The past performance of the fund provides insight into its current state
and can be considered when selecting a fund, but it in no way guarantees that future
returns will be the same.
The fund will experience different market cycles and investing for a longer period
provides a higher return.
Once you have thought about all these factors and decided, you can easily invest in them by visiting ICICIdirect’s website.

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