ELSS Mutual Funds- Creating Wealth While Saving Income Tax

When it comes to investments, many of us wait till the last three months of the financial year to begin the tax-saving exercise. In a bid to save as much tax as possible, you could go wrong in picking the instruments of investments that help you yield good returns over a period of time and also meet your financial goals.

Amid rushed planning, investors often do not give enough thought to the long-term consequences of their investment choices, focusing only on their budget and failing to become financially independent.

Advance planning is key to financial independence

To meet one's financial goals like retirement or marriage or buying a house, it is important to create a plan to achieve the potential that long-term investments have to offer. Besides returns, early planning helps pick instruments that are safer and save income tax out-go.

However, tax planning cannot be done in isolation, that is, when you pick a product of investment, it cannot be preferred solely for its tax benefits. Aspects like liquidity, savings and returns should also come into play.

Young investors, who are looking to invest for long-term financial goals while maintaining liquidity for emergencies, can consider ELSS funds.

What are ELSS funds? How do they work?

ELSS or Equity Linked Savings Scheme is a category of mutual funds that invests at least 80% of the fund money into equity. What sets ELSS apart from other equity-based mutual funds is that these come with tax benefits under section 80C of the Income Tax Act.

If you were to invest the maximum limit of Rs 1.5 lakh under section 80C, you can make a maximum tax saving of Rs 46,800 (at the highest tax bracket of 30%).

Moreover, these come with a lock-in period of 3 years, which is shorter than most other tax saving investment options in India.

At the end of 3 years, you can withdraw your money from ELSS, if you need the money or stay invested, if you think the fund has been performing well. Thus, the shorter lock-in period allows for flexibility and judgement on how your investment is performing.

Building wealth using ELSS

Equity investments perform their best when held on to for a long term. In ELSS, one can choose between dividend and or growth option depending upon the requirement of money. The growth option allows reinvestment of profits made till redemption. These are ideal for long-term life goals like children's education or retirement.

Ideally, if an investor can manage to stay invested for 10 to 20 years in an ELSS fund, he/she can create significant wealth as equity returns continues to compound.

ELSS funds have versatile features. Besides tax savings, almost all ELSS funds provide SIP (systematic investment plan) option, which allows you to invest a fixed amount in the fund of your choice at regular intervals.

The periodic and automatic deduction that SIPs allow, encourages you to save as well as invest regularly. Further, by investing through the SIP route over a longer period, you can benefit from rupee cost averaging during market corrections and dips.

If you wish to bet your money on an ELSS fund that maintains a healthy balance of large-caps and mid-caps, like the Axis Long Term Equity fund. This fund invests mainly in large cap stocks, that is stocks of companies that are known for their stable businesses. These provide healthy returns that beat inflation and create wealth in the long-term. Moreover, the 3-year lock-in period on the scheme allows the fund manager to make better judgement on providing you best returns without feeling the redemption pressure.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Axis Long Term Equity Fund (An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit)

• Capital appreciation & generating income over long term.
• Investment in a diversified portfolio predominantly consisting of equity and equity related instruments.

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them