Tax Saving Mutual Funds: Things to Know Before Investing

Mutual fund investment schemes that allow for income tax reduction are known as Equity Linked Savings Schemes. Taxpayers can reduce their taxable income by investing up to INR 1.5 lakh in certain stocks under section 80c of the Income Tax Act. Before putting your money into ELSS, it’s important to consider the following.

Confinement Timeframe:

Most assets that can get tax breaks under Section 80C of the Income Tax Act of 1961 have a mandatory lock-in period. The shortest key-Among the other assets included in the section, ELSS funds have the longest lock-in period, at three years. Therefore, ELSS fund units are locked up for a minimum of three years before being liquidated.

The results of this factor into compounding returns. Lock-in periods for other Section 80C investments, such the PPF, are 15 years, but the NSC is just five years. Therefore, you should think about include ELSS funds with the least lock-in and the ability to earn market-linked returns in your tax-saving investing portfolio.

Potential Danger:

You should know that the Net Asset Value of ELSS mutual funds, regardless of the amount you invest, is more volatile than that of other tax-saving options because they exclusively invest in firm equity securities. Long-term, systematic investment plans (SIPs) with a diverse portfolio can help reduce this danger.

Equity funds are known for their above-average long-term returns because they can weather short-term market volatility.

You may only deduct so much of your investment in ELSS funds from your taxes. There is a maximum annual tax deduction of Rs. 1.5 lakhs for any investment. Keep in mind that this Rs. 1.5 lakh deduction also applies to other tax-saving investment alternatives permitted by Section 80C of the Income Tax Act.

Your exemption on ELSS funds, for instance, would be reduced to Rs.50,000 if you also had a Rs.1,000,000 PPF investment. When calculating your after-tax profits, this is an important consideration to keep in mind.

To get your feet wet in the stock market, ELSS funds are a good option for novice investors. With the SIP option, you may deposit a predetermined amount of money each month into your chosen ELSS fund, gaining access to expert fund management and a diverse portfolio for a very little outlay of capital.

Uncertain Payoffs:

It’s true that ELSS funds have the potential for larger returns than other types of investments, but that doesn’t mean they’re risk-free. While a fund’s historical performance might be useful in assessing its current health, it should not be used as a predictor of future returns. Create a payment schedule for your taxes.

Investing over a longer length of time yields a larger return since the fund will experience a wider range of market cycles.