Gone are the days when people used to invest in mutual funds only for tax benefits. Now people invest in mutual funds as they usually give higher returns than other fixed investment options. Having said that, along with the investments growing over in the long run, mutual fund investments also help in reducing their tax liability.
With the start of this New Year, people are now looking towards tax saving schemes that will also give them high yields. Experts say Equity Linked Saving Scheme or ELSS funds are ideal for those with a high-risk appetite as they provide tax benefits under section 80C of the Income Tax Act.
As the name suggests, the savings under this scheme are invested in equity markets. ELSS is a diversified equity mutual fund, which is usually looked at by investors to save tax. Under the ELSS scheme, a minimum of 65 per cent of the fund’s assets are invested in the stock market. The funds invested are diversified and invested across different sectors, market caps, themes and industries.
While investing in equities, industry experts point out that long term investors in equities should ignore temporary market movements and not time the market. That is a wrong way of looking at mutual fund investments altogether, and investors will not be able to get the best out of their investments. It is always the right time to invest in mutual funds. Having said that those looking to earn high returns in a short period should keep in mind that the short-term market changes rapidly.
Equity-linked savings schemes come with a locked-in period of 3 years. After completion of your lock-in period, if your returns are low from the investment made due to underperformance of the market, you can continue with the fund without exiting. As/when the market rises and NAV (net asset value) of schemes increases, you can exit the scheme. Keep in mind, as ELSS is a market-linked product, the returns are not guaranteed or assured. Hence, similar to any equity investment, exit the scheme when the market is better positioned.
Industry experts say individuals investing in ELSS funds should not worried about the past or current state of the market. In the long run, investors earn good returns if stayed invested, along with the upfront benefit in the form of tax savings.
If you are planning to invest in ELSS, you can directly from a fund house or through online mutual fund distributor platforms. Having said that, choosing the right ELSS fund is equally important. While selecting, keep in mind, an ELSS fund should be in sync with your risk appetite and financial goal. Parameters such as stock concentration and diversification, market cap composition of the portfolio, expense ratio, etc. should be considered while choosing an ELSS fund.
However, especially for new investors, experts explain, one should not decide on their own, as new investors are not equipped to pick out their mutual funds. Hence, it is better to take the help of a financial planner or an advisor, with a proven track record of beating the markets.