Once the financial year draws to a close a general reaction would be to opt for tax saving instruments. You are going to explore the various options available to you and then arrive at the best among the lot. The various popular tax saving instruments are PPF, NSC though to invest in ELSS online happens to be popular among the lot. A combination of all these instruments offers a tax deduction of 1.5 lakh under section 80 C of the Income tax act.
More about ELSS fund
ELSS is a type of mutual funds that has a lock in period of 3 years. A major chunk of this fund is invested in equity based products. The other corpus in debt related instruments. Since these funds are modelled on the concept of equities there is a certain risk aspect with such securities. Though it may seem to be a tax saving instrument it is better that you stay invested for a longer period of time. You should not consider ELSS as a tax saving mechanism but part of an investment plan.
- Curbs inflation
- Better returns
- Works as a viable alternative to mutual funds that are close ended
Via ELSS higher returns
The classification of ELSS takes place via diversified equities that are beneficial for investing in the long term. To be allowed for tax exemption you can exit ELSS after 3 years of a lock in period. This means that the capital would remain locked during this period. In a way for an investor this might seem to be a disadvantage as it limits your liquidity there are various drawbacks.
To earn sustainable returns from equity investments it is suggested that you remain invested for a longer period of time. As the capital remains locked in for 3 years there is scope for earning returns.
Deals with inflation
With equity investments there is scope of earning higher rates of return that can deal with inflation. The deposits or bonds can also provide returns but are not in a position to deal with inflation.
Because of a 3 year lock in period with ELSS, would pave way for the fund managers to take in long term calls. The outflow along with inflow in case of such schemes is not that volatile that paves way for better fund management. So not only at the end of the financial year you should invest in ELSS but all throughout the year to cash in on the benefits of ELSS. Opt for a SIP as it would allow you to incorporate funds at periodic intervals of time.
An option in comparison to close ended funds
Most of the direct mutual fund app companies are providing the option of close ended funds that encourages investment through long term planning. ELSS also operate on the same principle where you fund has a lock in period of 3 years. But the major benefit of ELSS over close ended funds is that you can withdraw money after 3 years.