Both avenues for tax saving investments in India are Equity Linked Savings Schemes, ELSS and PPF, Public Pension Provident Funds. ELSS is a type of mutual fund that primarily invests in stocks and offers tax benefits under Section 80C. On the other hand, PPF is a government-backed scheme to encourage long-term savings that provides tax-free interest for 15 years. Let's look at what ELSS means and how you can choose the right fund for your financial goals
The key elements of ELSS are as follows:
- Tax Benefits: In Section 80C, ELSS provides for a deduction of up to INR 1.5 lakh per annum. As a result, it is an attractive option for tax-saving investments. But investments of up to INR are all that is needed. The tax deduction is available to 1.5 million people.
- Equity Exposure: ELSS funds invest a significant proportion of their assets in the stock market, which historically provides better returns over time. Despite the risks associated, the equity market offers significant growth potential, in line with investors' long-term financial objectives.
- Lock-in Period: ELSS shall have a three-year lock, the shortest among section 80 C investments. This ensures that investments are made in a disciplined manner and that tax benefits are provided.
- Potential for Returns: ELSS funds can offer reasonable returns compared to traditional fixed-income instruments due to their equity exposure. They are therefore suitable for investors looking to take advantage of growth prospects.
How to choose the right ELSS Mutual Fund:
- Investment Strategy: Consider the fund's investment strategy, whether it is focused on large and medium-sized cap stocks for stability or takes an aggressive approach with a view to their growth potential. Your selection must be aligned with your financial objectives, risk tolerance, and investment horizon.
- Performance: Assess the fund's past performance, looking for consistent returns over several periods. Remember, however, that past performance does not guarantee future success. Before preparing the strategy, carefully evaluate the fund's track record.
- Risk Metrics: By using metrics such as sharpe ratios and standard deviations, risk indicators can be used to assess the risks of a fund. Funds with lower volatility and consistent returns under different market conditions should be sought
- Fund Manager: Investigate the expertise and track record of the fund manager in managing equity funds. The performance of the ELSS mutual fund can be greatly influenced by a competent manager.
- Lock-in Period: Understand the three-year lock period associated with ELSS Funds and ensure that it is aligned with your investment strategy and financial objectives.
- SIP: choose whether to invest in a systematic investment plan or a lump sum. The benefit of rupee cost averaging, which is suitable for investors looking for long-term gains, can be obtained by investing in the SIP.
Conclusion
By exposure to the equity market, ELSS provides tax savings with growth potential. To select the appropriate mutual fund that is in line with fiscal objectives, an assessment of investment strategy, performance, and risks is essential.
**“Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.”**
