The default feature of equity lock-ins helps to prevent investors from making any rash and impulsive redemptions from their funds at the first sight of market volatility. Investors who wish to attain the primary arithmetic combination of building and growing their wealth while saving on taxes can consider investing in ELSS mutual funds. This article will explain how ELSS investments can become your stepping stone to long-term equity investments. Let’s dive in.
What is ELSS?
Equity-Linked Savings Schemes, commonly known as ELSS are tax-saving mutual funds that invest a majority of their assets, at least 80% in equities and equity-related securities. Just like other Section 80C investment options, investments in ELSS tax saving mutual funds are eligible for a tax deduction of up to Rs 1.5 lac under section 80C of the Income Tax Act, 1961. By opting for these tax saving funds, an investor can avail up to Rs 46,800 per annum. These exemptions and tax deductions help an investor to lower their tax outgo. One must note that ELSS funds have a mandatory lock-in period of three years. This also happens to be one of the shortest lock-in tenures as opposed to other Section 80C investments.
But, what makes ELSS funds so special?
The three-year lock in period associated with ELSS investments help an investor to stay invested for a minimum duration of 36 months. Mutual fund experts believe that this mandatory lock-in aids in preparing the investor and facing the volatility associated with equity investments. As the investors are ‘forced’ to stay invested for the lock-in tenure, they have to hold their mutual fund investments. And in this process, they learn an invaluable lesson about equity investments. You must not fear the volatility in stock markets, instead befriend them and embrace them gracefully. What’s more sticking to your ELSS investments is quite rewarding in the long run.
Experts believe that the mandatory lock-in period also helps an investor in other ways too. Once an investor gets used to the volatility and is comfortable with the unpredictable markets and understand that their investments will bounce back after a bad phase in the stock market, it helps them boost their confidence with stocks and mutual funds. This will help them to invest further in equity markets.
What’s more, the double digit returns offered by ELSS investments are one of the biggest reasons why investors get drawn to ELSS tax saving investments like bees to a wax. This helps the investors understand the importance of investing in mutual funds and equity funds especially. Equity funds have a huge potential to generate significant returns over a period. Though ELSS funds have a lock-in period of just 3 years, experts advise staying invested for a longer duration to enjoy the full benefits of these mutual funds. While choosing the right ELSS scheme for your portfolio, ensure that the objectives of the scheme is in line with your risk profile, investment horizon, and financial goals. Happy investing!
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