Making new investments is an excellent way to start the new year. If that's the plan, why not pick an option with dual benefits of tax savings and wealth generation? For that, consider equity-linked savings scheme (ELSS) funds, also called tax-saver mutual funds.
While they act as high-return mutual funds and help you save tax, investors often need to approach these funds correctly. Since they are equity instruments, you must treat them differently from other Section 80C options like tax-saving fixed deposits, public provident funds, and more.
So, if you wish to invest in tax-saver mutual funds, here is how you can make the most of them.
Go for SIP Investments
Unlike a traditional insurance plan or a tax-saving FD, where you make a lumpsum deposit, ELSS funds work better with a different approach. As an equity instrument, it is subject to market risks. Therefore, its performance depends mainly on entry and exit timings.
If you deposit a lump sum in the fund, the time of entry will impact the returns. Investing when the market is at its peak could lead to capital loss which also offset any tax benefits achieved when you invested.
It's smarter to invest regularly through a systematic investment plan (SIP) from the start of a financial year. Thus, you can benefit from rupee cost averaging to reduce the average cost of your investments and make way for higher gains in the long term.
Invest Within Limits
It's best to refrain from investing in multiple Section 80C options like Public Provident Fund, fixed deposits, National Savings Certificate, and New Pension Scheme. Then this will leave little room for tax savings on ELSS investments.
Besides, the percentage of returns they offer ranges from 5% to 10% as against 15-18% returns offered by tax-saver funds over time. So, investing a higher amount in these high-return mutual funds is better than spreading the amount across multiple tax-saving instruments. Consider investing in a traditional diversified equity scheme if you want higher exposure. If you hold some conventional equity funds, it's usually enough to invest in 1-2 tax-saver mutual funds simultaneously.
Don't Choose Dividend Reinvestment
It's wise to choose the dividend or growth option when you invest in ELSS funds. Every installment is locked in for 3 years. After that, any dividend received will be reinvested in the reinvestment option, and the units will again have a 3-year lock-in period. Supposing the scheme declares dividends regularly, some units might remain locked forever.
Redeem Gradually
It's not wise to redeem your investment after the lock-in period since ELSS funds are not just for tax savings. They can also help you achieve your long-term financial goals. If you don't need money urgently, staying invested in the scheme is best. There's no compulsion to redeem the investments once the lock-in period ends.
Conclusion
Follow the above tips and begin your investment journey early to get maximum time to grow your money to fulfill your long-term financial objectives.
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