Mutual Funds
5 Golden Rules of Mutual Fund Investing for First-Timers
ELSS or Equity Linked Saving Scheme mutual funds primarily invest in equity or the stock market. While there is no upper cap on the investment limit in an ELSS fund, amounts deposited up to Rs. 1,50,000 are entirely tax free.
In other words, you can claim a tax deduction on Rs. 1.5 lakhs under Section 80C of the ITA, as you would when investing in PPF, fixed deposits, or any other tax-saving instrument. Except, these mutual funds come with a lower lock-in period of only 3 years, as opposed to several other tax saving instruments.
Moreover, if your fund is making good money after 3 years, you don't need to redeem it. In fact, leaving it intact to gather higher returns will grow your wealth manifold.
If you just want to dabble rather than delve deep into ELSS funds, the option of investing in them through a Systematic Investment Plan or SIP is also available. Keep in mind that the mutual fund market is heavily regulated by SEBI, which makes investing in tax saving mutual funds incredibly transparent and safe.
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Tax-Saver Funds, which are also known as Equity-Linked Savings Schemes or ELSS funds, are a special category of mutual funds that provide tax benefits to investors under section 80C of the Income Tax Act of 1961. These funds are equity-oriented and hence, invest at least 80% of their corpus in equity shares and other equity-based instruments.
You can start investing in tax saving mutual funds with a minimum of Rs. 500 through an SIP or a lump sum. The amount invested in these funds is available for tax deductions, up to a maximum of Rs. 1.5 lakhs. ELSS mutual funds have a lock-in period of three years, which means that you’re not allowed to withdraw your money before that.
Investing in the best ELSS mutual funds can help you save taxes and earn decent returns. Below are the points you should consider while selecting the right ELSS fund for investment:
Look at the Investment Strategy
Different fund managers use different investment strategies to deliver maximum returns. So, it’s crucial to understand a fund manager’s strategy before investing in an ELSS mutual fund. For example, analyze whether a fund manager is investing in large-cap stocks, small-cap stocks, or mid-cap stocks to understand if their strategy aligns with your investment goals and risk appetite.
Analyze the Historical Performance
Your objective behind investing in an ELSS fund should not only be saving taxes but also to fetch high returns on your investments. That is why you should always analyze the past performance of a fund before investing in it. Compare the fund’s performance with its peers to ensure that it has delivered consistent returns over the years.
Compare the Expense Ratio
The expense ratio of a mutual fund determines what portion of your investment goes towards the management of funds by the fund manager. A higher expense ratio translates into lower returns and vice-versa. So, if there are two funds with similar track records, you should invest in the one with a lower expense ratio.
Below are the advantages of investing in tax saving mutual funds:
Tax Benefits Under Section 80C
The most notable advantage of ELSS mutual funds is that they allow tax benefits of up to Rs. 1.5 lakhs under section 80C of the Income Tax Act. You can claim your ELSS investments as deductions from your annual taxable income.
Opportunity to Earn High Returns
By investing in ELSS mutual funds, you allow yourself to earn high returns on your investments. Since these funds invest majorly in equity instruments, they have the potential to provide inflation-beating returns in the long term. Also note that mutual funds are managed by professional fund managers and hence, are less risky.
Shortest Lock-in Period Among all 80C Instruments
ELSS mutual funds come with a lock-in period of only three years, which is the shortest among all investment instruments that qualify for tax benefits under section 80C. It means that these funds offer you the maximum liquidity as compared to other 80C investment avenues. You can withdraw your investments anytime after the completion of the first three years.
Disciplined Approach to Investing
ELSS mutual funds allow you to take a disciplined approach to investing. You can invest in ELSS funds through a Systematic Investment Plan (SIP) or lump sum. If you opt for the SIP method, you will be able to invest fixed amounts in ELSS funds at a fixed date every month. You can start your ELSS SIP for as low as Rs. 500 per month.
Comparison with Other Tax-Saving Instruments
As you know, ELSS mutual funds come with the shortest lock-in period among all other tax-saving investment instruments that qualify under section 80C. Below is a comparison between tax saving mutual funds and other popular 80C instruments, such as Public Provident Fund (PPF), National Pension System (NPS), and Tax-Saving Fixed Deposits (FDs).
ELSS |
PPF |
NPS |
Tax-saving FD |
|
Returns |
12% to 15% |
7% to 8% |
8% to 10% |
6% to 7% |
Lock-in Period |
3 Years |
15 Years |
Till Retirement |
5 Years |
Tax on Earnings |
Partially Taxable |
No |
Partially Taxable |
Yes |
Things Investors Should Consider Before Investing in ELSS Funds
ELSS funds or tax saving mutual funds allow you to gain tax benefits of up to Rs. 1.5 lakhs and get superior returns on your investments. However, as an investor, you must consider several factors before making an ELSS investment. These include:
You should always evaluate the risk-return ratio before investing in any instrument and make sure that it aligns with your investment goals and risk appetite. Since ELSS mutual funds are equity-oriented funds, they carry higher risks than other 80C investment instruments. At the same time, they have the capability to deliver superficial returns in the long run.
Lock-in Period
Another thing that you should remember before investing in an ELSS fund is that it comes with a lock-in period of three years. It means that you are not allowed to withdraw your investments in these funds before the completion of the first three years. However, the lock-in period for ELSS is the shortest among all other investment instruments that qualify under section 80C.
SIP or Lump Sum
You can invest in ELSS mutual funds in two ways - through a Systematic Investment Plan (SIP) or a lump sum method. While an SIP allows you to make fixed investments at fixed intervals, the lump sum method allows you to make one-time investments in mutual funds. You need to select an appropriate method as per your investment needs.
Taxability of ELSS Mutual Funds
As ELSS mutual funds are categorized as equity-oriented funds, returns from them are taxed accordingly. Any dividend received from these funds is added to your annual taxable income and taxed as per the applicable income tax slab rate. Until 2020, dividends received from equity mutual funds were tax-free in the hands of investors.
Since ELSS funds come with a lock-in period of three years, the probability of getting Short-Term Capital Gains (STCG) is ruled out. Hence, returns from ELSS mutual funds are taxed as per Long-term Capital Gains (LTCG) taxation rules. It means that gains of up to Rs. 1 lakh are tax-exempted, whereas gains exceeding this limit are taxed at a 10% rate without any indexation benefits.
Risk Associated with Tax Saving Mutual Funds
ELSS mutual funds are equity-oriented funds. Hence, they are naturally influenced by market movements. That is why the risks associated with them are usually very high. However, you can easily mitigate these risks by staying invested in the funds for a long term of five years or more. The mandatory lock-in period of three years also helps in reducing these risks.
You can invest in a tax-saving mutual fund online through a mutual fund distributor. What you need to do is create your account by submitting the required KYC documents. You can also invest in ELSS funds through the Moneyfy platform in the following steps:
Step 1 - Visit Moneyfy’s website or download the Moneyfy app on your smartphone.
Step 2 - Create your account and submit the required KYC documents and bank details.
Step 3 - Select the ELSS mutual fund you want to invest your money in.
Step 4 - Make your ELSS investment through any of the available online payment methods.
A Demat account is not required to invest in mutual funds. You can take the help of a mutual fund distributor or broker to invest in tax saving mutual funds. You can make your investment through NetBanking or UPI.
A Systematic Investment Plan or SIP allows you to invest fixed amounts in mutual funds at fixed intervals. SIP is the best method for long-term wealth creation through mutual funds. You can start your SIP in an ELSS fund for as low as Rs. 500 per month. To start your ELSS SIP, you can visit Tata Capital’s Moneyfy platform. Below are the steps you need to follow to invest in ELSS mutual funds through SIP using the Moneyfy platform:
Step 1 - Visit the Moneyfy website or download the app on your smartphone.
Step 2 - Create your investor account by completing your e-KYC.
Step 3 - Select the mutual fund scheme in which you want to start an SIP.
Step 4 - Enter your bank account details and the SIP amount to set up an SIP auto-debit.
Step 5 - Select the date of the first SIP. Your recurring SIPs will be made on this date thereafter.
Step 6 - The SIP amount will be deducted from your bank account every month, and it will get invested in the selected tax-saving mutual fund.
If you want to make a one-time investment in a mutual fund scheme, you will need to opt for the lump sum method of investing. You can make lump sum investments in a tax-saving mutual fund online or offline through the fund house or a mutual fund distributor. To invest a lump sum online, you will need to visit AMC’s website or Tata Capital’s Moneyfy platform. After creating your investor account and completing your e-KYC, you can select the suitable ELSS mutual fund scheme and choose the lump sum option to invest in it. Then, you can make your investment using any of the available online payment methods.