Features and Benefits of Tax Saving Mutual Funds

With a plethora of options available to an investor, individuals can get overwhelmed easily. You should choose the ideal investment avenue according to your financial objectives, investment horizon and risk appetite. However, if saving taxes is one of your criteria to invest in mutual funds, you should consider ELSS funds.ELSS or Equity Linked Savings Scheme invests predominantly in equity or equity-related securities. Let’s look at some features and benefits of ELSS mutual funds to understand if they perfectly align with your investment objectives.

Features of ELSS funds

1. You can invest in ELSS via a Systematic Investment Plan (SIP) or lumpsum mode. SIP allows you to invest as low asRs500. Additionally, unlike other tax-saving investments such as National Savings Certificate (NSC) or Public Provident Fund (PPF), there’s no upper limit for investing in ELSS funds.
2. Although there’s no limit to investments in these tax saver mutual funds – ELSS, investments up to Rs1.5 Lakhs are eligible for tax rebates.
3. Most ELSS mutual funds have entry and exit loads. These are the fees charged by providers on redemption or sale or transfer of funds by investors.
4. Since ELSS funds are market-linked diversified equity schemes, this gives them an added advantage over other fixed-return investments offering tax benefits. These tax saver mutual funds provide potentially higher returns and tend to beat the adverse impact of inflation in the long term.
5. Just like any other equity mutual fund, ELSS funds offer both growth and dividend option. Under the growth scheme, individuals receive lumpsum after the expiry of the scheme. However, under the dividend option, investors receive regular dividend income whenever the dividend is declared by the fund house, even during the lock-in period.

Benefits of investing in ELSS

ELSS funds hold an edge over other investment avenues on several counts. Some of these are:

• Shortest lock-in period
  ELSS funds are accompanied with a lock-in period of just 3 years. These tax saving mutual funds enjoy the lowest lock-in period among other Section80C investments against PPF, NSC, etc.

• Potentially higher returns
  Most tax-saving 80C investments offer single-digit returns on an average – anywhere between 6-8%. However, ELSS funds have the potential to generate significantly higher returns. The average returns offered by ELSS mutual funds are 12-14% over a period.

• Better post-tax returns
  Long-term capital gains or LTCG is exempted up to Rs1 lakh on ELSS investments. LTCG above Rs1 lakh is taxed at just 10% offering better post-tax returns than other tax-saving investments.

• High levels of transparency
  Just like any other mutual fund, ELSS mutual funds are managed by mutual fund houses. As per Securities and Exchange Board of India (SEBI), Asset Management Companies (AMC) have to make periodic disclosures about key information of various schemes managed by them. Until now, no mutual fund tax saver exhibits a higher degree of transparency than ELSS.

• Diversification and ability to switch funds
  ELSS mutual funds offer diversification across various sectors and companies. You can further diversify across different fund houses and investment styles. As an investor, you have the liberty to stop your investing in any underperforming fund (if any) at any point and switch to another one.

Most mutual fund experts agree that among the various tax-saving investment options, ELSS offers an excellent combination of market-linked returns, shorter lock-ins and greater flexibility, making them one of the top choices for investors. Haven’t started your investments in ELSS funds yet? Don’t worry; it’s never too late. Happy investing!