Tax Saving Mutual Fund – ELSS
ELSS are Equity Linked Saving Schemes which are a tax saving investment under 80C. It is a part of the Rs 1.5 lakh income tax saving limit you can avail of under Section 80C in order to reduce your income tax.
With a lock in period of only 3 years, ELSS (Equity Linked Savings Scheme) has the shortest lock in period compared to the other 80C tax saving investments.
Under ELSS (Equity LInked Savings Scheme), over 65% of the corpus is invested in stocks, making it an equity centric investment option, thus earning you tax free returns as Long-Term Capital Gains (LTCG).
Similar to any other equity fund, dividend income from ELSS (Equity LInked Savings Scheme) is also tax free.
However, since it is an equity investment, it comes with a considerable risk. There are no guaranteed returns, as the returns are market linked.
How to choose a Mutual Fund
While selecting a mutual fund, it is prudent to pick one with a track record of at least 5 years and a sizeable investor base, reflecting in the AUM (Assets Under Management).
There are both lump sum and SIP (Systematic Investment Plan) options and investing in a fund is easy. It requires minimal paperwork. However, existing mutual fund investors have recently been mandated to comply with the additional KYC (Know Your Customer) and FATCA (Foreign Account Tax Compliance Act requirements)
You may have observed that in long term, average returns given by equity mutual funds (like ELSS) beat safer options like PPF. But that doesn’t mean that you put all your money in equity mutual funds. It is always good to diversify your investment across different asset classes to reduce the risk of over concentration.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.