ELSS tax-saving mutual funds are considered as the most-sought tax-saving investments owing to their low lock-in tenure, higher potential for significant returns combined with tax-saving abilities. These mutual funds provide the investors with dual benefit of tax-saving benefits and capital appreciation. However, did you know that apart from saving you loads on taxes, these tax-saving mutual funds can also make you a crorepati? Here’s how you can achieve a sum of Rs 1 crore.
What are ELSS funds?
ELSS funds are a type of mutual funds that invest a majority of their capital, at least 80% of their assets in equity and equity-related instruments. These mutual funds have the lowest lock-in tenure of three years as opposed to other Section 80C tax-saving investments. Investments in ELSS mutual funds are eligible for a tax deduction of up to Rs 1.5 lac u/s 80C of the IT Act, 1961. As an investor, you can save up to Rs 46,800 by investing in these tax-saver mutual funds. Though ELSS mutual funds have a lock-in period of just three years, experts recommend staying invested for a longer duration.
How can ELSS funds make you a crorepati in 20 years?
ELSS mutual funds have the potential to generate double digit returns when invested for a longer duration, say ten to twenty years. According to a leading mutual fund research website, ELSS funds provided an average 10-years returns at more than 12% as in Jan, 2021. This figure is likely to increase when invested for a more elongated duration.
So if you invest Rs 1.5 lac every year in ELSS mutual funds, to gain the tax deduction, you end up saving up to Rs 46,800 in taxes, provided that you fall in the highest tax slab. What’s more, assuming an average CAGR of 12% p.a., your mutual fund investments are expected to accumulate a sum of Rs 1.25 crore in a span of 20 years when you invest Rs 1.5 lac every year, or Rs 12,500 every month. Even if you lower your long-term return expectations to 10% instead of 12%, using a mutual fund return calculator, you’d find that you would still be able to accumulate a sum of Rs 96 lacs by the end of 20 years.
To fully utilise the benefits of ELSS funds, investors recommend investors to link their ELSS investments with their long-term goals, so they are not tempted to exit the market at slightest discomfort or volatility. That being said, investors should be wary that returns of mutual fund investments are not guaranteed and are subject to market risk. Additionally, there is no assurance that the past returns can be taken as a definitive indicator for future returns. Investing in mutual funds requires through analysis of the fund and their returns at different phases. Invest in mutual funds after carefully analysing your risk profile, investment horizon , and financial goals. Happy investing!
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