Equity Linked Saving Schemes (ELSS), also known as tax-saving mutual funds, are considered as best options for individuals looking to save on taxes while investing. Before diving into ELSS funds, it’s crucial to understand some key points to make informed decisions.
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1. Lock-in Period:
ELSS funds have the shortest mandatory lock-in period compared to other Section 80C investment options. While ELSS has a three-year lock-in period, alternatives like the Public Provident Fund (PPF) require a 15-year commitment. Despite the short lock-in, it’s advisable to view ELSS as a long-term investment, ideally spanning five to seven years. Withdrawing funds before three years is not recommended, making ELSS suitable for those with long-term financial goals.
2. Risk Considerations:
ELSS primarily invests in stocks, which may deter new investors due to perceived higher risks. However, this risk can be mitigated by adopting a long-term investment horizon in ELSS. Continued investment even after the initial three-year lock-in helps navigate market volatility. Long-term commitment is key to overcoming market fluctuations and achieving superior returns from equity investments.
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3. Equity Investment Introduction:
ELSS serves as an ideal entry point for individuals venturing into the equity market. The mandatory three-year lock-in period allows investors to acclimate to stock market volatility. It acts as a stepping stone for those looking to expand their equity investment portfolio with confidence gained from ELSS experience.
4. Section 80C Limitations:
The Income Tax Act’s Section 80C permits a tax deduction on investments up to Rs 1.5 lakh only. Given the crowded nature of this section, with various qualifying options like PPF, EPF, FD, NPS, NSC, and ULIP, careful consideration is needed. Investing more than the required amount in ELSS won’t yield additional deductions under Section 80C.
5. Realistic Return Expectations:
ELSS holds significant potential for good returns, primarily because of its equity stock investments. However, it’s crucial to maintain realistic expectations regarding returns. Achieving better returns requires a commitment to a longer-term investment horizon, aligning with the inherent nature of equity markets.
