Why are you opting for tax saving funds?
For these compelling reasons, you should include a tax savings mutual fund in your portfolio.
Tax benefit under Section 80C: There are no surprises here. Under Section 80C of the Income Tax Act, your investment in ELSS is liable to tax deduction of up to Rs 1.5 lakh from your total gross income.
Shortest lock-in period: Typically, all tax-saving mutual fund investments come with a mandatory lock-in period. For example, the Public Provident Fund (PPF) has a lock-in period of 15 years, which is another tax saving instrument under 80C. Nevertheless, from the seventh year, you are allowed to make partial withdrawals in PPF.
Taxes saving deposits have a lock-in period of five years. The ELSS comes with a three-year lock-in. After three years, you can sell your investment in ELSS.
Profit from equity exposure: If you are a traditional investor who chooses a tax-saving strategy with guaranteed returns, then you should consider investing in ELSS to take a small amount of equity exposure. ELSS is deemed to be ideal for first-time buyers of the stock market. The mandatory lock-in period will help investors with the uncertainty of the weather stock market.
No maturity date: Among other things, best tax saving elss funds such as PPF, tax-saving term deposits, come with a maturity date. The PPF scheme matures after fifteen years and can expand over the next five years.
An ELSS does not have such a fixed date or period of maturity. As long as you can save your ELSS, you can keep it. But a common mistake that most investors make is to redeem their investment at the end of a three-year lock-in in ELSS.
Since the underlying asset class here is equity, they should invest for at least five-seven years to get good returns. Finally, it is true that ELSS is a set of benefits. It does not mean that you should blindly invest in it. You should invest in it if it meets your investment objective, horizon and risk profile.
The best way to invest in tax saving funds
ELSS gives two investment options.
- First, lump sum and
- Second, a systematic investment plan (SIP).
You can invest in small monthly instalments or SIPs.
Invest lump sum at a time.
Investment in tax planning is something that a taxpayer has to do every year.
In this way, SIPs are beneficial.
If you choose an excellent ELSS fund and start a monthly SIP based on your tax planning criteria, then with a small-time effort, you can take care of your tax planning savings, at least related to the ELSS part. Always note, ELSS has a lock-in time of 3 years as a tax saver account. It will give you very little liquidity, as you cannot redeem your cash before three years.
When you invest in ELSS through SIP, you can redeem that instalment in the same way after three years. Investing often leads to stress and makes a good investment habit. An ideal practice would be to start a SIP at the beginning of the financial year and continue until next March.