These funds fall under the category of Equity Linked Savings Scheme (ELSS). They are a type of mutual fund that mainly invests in equity markets. Many investors choose them to reduce their taxable income. Under Section 80C of the Income Tax Act, you can claim a tax deduction of up to ₹1.5 lakh by investing in these funds. This blog will explore how they work, their features, and benefits.
Tax saving mutual funds primarily invest in equity-related instruments, mainly comprising shares of listed companies. Their primary purpose is to offer tax-saving benefits to investors while also aiming for capital appreciation over time.
These mutual funds carry a three-year mandatory lock-in period, encouraging long-term investments. You can simply access, track, and invest in these funds through a mutual fund app. Such apps provide a convenient way to monitor fund performance, set up SIPs, and make informed financial decisions based on your investment goals and risk tolerance.
The following are some of the significant features of tax savings mutual funds:
These funds come with a fixed lock-in period of three years from the date of investment, which is the shortest among the tax savings options.
A significant portion of the fund is allocated to the listed equity stocks, and returns depend on the equity market’s performance.
Investors may choose the growth option or the dividend option based on their income preferences and long-term financial planning requirements.
Most mutual fund houses allow investors to invest from Rs 500, making these funds accessible to small and first-time investors with limited financial budgets.
The fund managers pool funds from many investors and invest them in a diversified portfolio of equity stocks. The fund manager invests in equity stocks. Investors get units based on the amount they invest. Investors receive units based on their investment amount and the current Net Asset Value(NAV). The NAV changes depending on market performance, and investments remain locked in for three years to promote discipline.
Let us understand some of the possible benefits:
Equity markets have shown long-term growth trends, and investing for three years or more may help accumulate capital.
Compared to other tax-saving options like PPF ( Public Provident Fund) or NSC ( National Savings Certificate), ELSS has a shorter lock-in period of three years.
Investors can invest in these funds through Systematic Investment Plans (SIPs), which encourage investors to save regularly and develop financial discipline.
Most mutual fund apps allow you to choose, invest, and monitor ELSS mutual funds from your phone with minimal documentation and effort.
The following are the key things to consider when investing in these mutual funds:
Equity investments come with market risks. Returns may vary based on market movements, so investors should evaluate their risk tolerance before investing in the equity market.
Investments are locked in for three years, and no premature withdrawal or redemption is permitted during this period.
Mutual fund investments cannot be expected to have potential returns every time, and past performance cannot ensure similar outcomes in the future.
Use a mutual fund app to compare different ELSS mutual funds based on fund history, expense ratio, and fund manager experience.
The following are the steps to follow when investing in tax savings mutual funds:
Step 1: Download a SEBI-registered mutual fund app from a trusted source or visit the official mutual fund website.
Step 2: Complete your Know Your Customer (KYC) formalities using PAN, Aadhaar, and address proof.
Step 3: Select an ELSS scheme based on your risk level and financial goal from the available options.
Step 4: Choose the investment amount and decide between SIP or lump sum.
Step 5: Make the payment using the app or online platform and receive your investment confirmation digitally.
Step 6: Track investments through the app, view NAV movement, and download tax reporting reports.
Tax-saving mutual funds are suitable for long-term capital appreciation as well as tax planning. These funds have a mandatory three-year lock-in period. This helps promote disciplined investment as per long-term financial goals. Investment can be made through SIP or lump sum through a mutual fund app. Such apps make the process easy and accessible. Always go through all scheme-related documents before investing. Information on fund details helps in making informed financial decisions based on your goals.