5 Reasons Why ELSS Mutual Funds are More Than Just Tax Saving Funds

ELSS or Equity-Linked Savings Funds are often considered tax-saving investments as they offer tax benefits under section 80C of the Income Tax Act. Along with it, the funds also offer capital appreciation and competitive returns.

Top 5 Reasons Why ELSS Funds Offer More Than Just Tax Savings

Let’s explore five compelling reasons why ELSS mutual funds are more than just tax-saving funds:

Equity Exposure with Potential for Growth

ELSS funds predominantly invest in equities and equity-related instruments, offering investors an opportunity to participate in the growth potential within the stock markets.

Unlike fixed returns from traditional tax-saving options like PPF or NSC, ELSS funds can leverage the dynamism within equities. In other words, this equity exposure ensures that these returns beat inflation over time and create wealth. We can accumulate significant amounts of wealth through compounding and long-term investment perspective.

Shorter Lock-in Period

One distinguishing aspect of ELSS funds is their comparatively short lock-in period compared to other tax-saving options. While PPF investments require a commitment of up to 15 years, ELSS funds have a shorter lock-in period of only three years.

This shorter length increases liquidity and allows investors to reassess their investing plans more frequently. Furthermore, the shorter lock-in period is compatible with financial objectives other than tax planning, such as saving for a down payment on a home or supporting higher education expenses.

Professional Management and Diversification

ELSS funds are managed by experienced fund managers who conduct extensive research and analysis to build well-diversified portfolios. ELSS funds improve portfolio stability by diversifying across sectors, industries, and market capitalizations, reducing risks associated with particular companies and sectors.

Fund managers’ stock selection and allocation expertise offer value by maximizing returns while minimizing volatility. For investors who don’t have the time or competence to manage their portfolios actively, ELSS funds provide a handy way to get professional management services.

Systematic Investment Advantage

ELSS funds offer SIPs, which help in systematic investment planning and allow investors to spread their investments over some time. This means one can make periodic investments (monthly/quarterly) at or at a given time.

SIPs also ensure that individuals are not influenced by the highs or lows of the market but rather make regular investments, thereby avoiding panic selling, especially when prices are very low. These units can be bought at different times for different amounts at different prices depending on the NAV prevailing at that particular time.

It helps to average out the costs of purchase when markets fluctuate, which could result in better returns in the long run. It provides an antithesis to market timing, creating a disciplined nature towards a savings culture required for achieving financial objectives.

Tax Efficiency Post Lock-in Period

While ELSS funds are generally recognized tax-saving instruments, they remain tax-efficient even after the lock-in period. In fact, unlike fixed deposits, where all returns are taxed fully, ELSS funds enjoy long-term capital gains tax post-lock-in period.

For example, any profit realized after three years on such investments attracts 10% per annum flat rate taxation above ₹1 lakh, making them more suitable for people who belong to higher income slabs and investors from the HNIs group.

The growth in these funds is also taxable after withdrawal, and hence, this favourable treatment significantly increases ELSS post-tax return, enhancing overall portfolio yield.

Final Words

ELSS funds offer investors a unique blend of tax benefits, growth potential, and flexibility, making them a versatile investment choice. Beyond serving as tax-saving instruments, ELSS funds provide exposure to equities, professional management, diversification benefits, and the convenience of systematic investment planning.

By harnessing the power of ELSS funds, investors can optimize their tax outflows and achieve their long-term wealth creation goals effectively. If you are looking forward to investing in a direct mutual fund, create an account on Dhan and start investing today.