The fear of using financial products sometimes makes one wonder if they do come with a halo around them.Truth be told, there is more fog than light when it comes to some great financial solutions available around. Tax Saving Mutual Funds better known as Equity Linked Savings Schemes (ELSS) is one such immensely under-utilized investment option that combines tax saving benefit with potential returns from investing in equities. Though they do carry moderately high risk, but you could aim to minimise the risk involved by investing in these funds for longer periods of time i.e. for at least 5 to 7 years.
For newbies, it is a kind of mutual fund which invests in shares listed on stock market & managed by an expert professional. It is primarily used for investing to save on taxes and long term growth. Many of us do not completely understand the different features of ELSS, thus losing on a probable opportunity to achieve 2 key financial goals with one solution. Here are 4 important things you should know about ELSS:
1. The Lock-in period – ELSS has the shortest lock in period among all the options available under Section 80C. Your investments are locked in for a period of 3 years from the date of investment. For example, if you invest Rs.50,000 in Dec’17 your investment would reap after 3 years i.e. in Dec’20. In case you invest through SIP (Systematic Investment Plan) then in that case each SIP instalment is treated as a separate investment & it must complete 3 years before it could be redeemed. For example, you do a monthly SIP starting Dec ’17 till March ’18 then you can start redeeming your investments from Dec ’20 till March ’21on First In First Out basis.
2. ELSS & Retirees – Many believe that one should not invest in equities post retirement. But we also know that inflation eats up your return on investment post retirement as well. Hence, if you can take risks & have surplus money, over & above your periodical income requirements then you may consider investing a portion of your money in ELSS. It will not only save tax for you but also aim to give you better inflation adjusted returns as compared to traditional saving instruments.
3. Investment tenure – You can remain invested in ELSS even after the 3 year lock in period is over. In fact it is recommended that you should remain invested in ELSS for longer periods of time as equity investments tend to perform well in long term minimising the risk involved and maximizing your returns.
4. Maturity/Redemption Proceeds – Maturity amount or returns earned from most of the eligible instruments under Section 80C are taxable and added to your income. But investments made in ELSS fall under EEE (Exempt Exempt Exempt) category. It means not only you save tax by investing in ELSS but any returns/dividends & maturity amount you receive once you redeem your ELSS investment is also tax free.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully