Why ELSS tax saving mutual funds are suitable for long term financial goals

Tax planning is usually done during the last three months of the financial season. Nevertheless, it is good if you plan it during the beginning of the financial year and avoid the rush of last-minute tax savings. Several options qualify for a deduction u/s 80C of the income tax act. One such option is the ELSS tax saving mutual fund that offers twin benefit of tax saving and wealth creation due to the equity component.

Equity-Linked Saving Scheme (ELSS), also referred to as the tax-saving funds, falls under the diversified category of mutual funds. As per SEBI categorization, they invest a minimum of 80% of the total assets in equity and equity-related instruments.

ELSS tax saving mutual funds have a relatively better long-term wealth-building potential than other range of tax-saving instruments such as life insurance premiums, PPF, NPS, NSC and others. Along with being one of the popular tax-saving instruments among the 80C tax-saving provision, ELSS (Equity Linked Savings Scheme) can also be an efficient investment option to achieve long-term financial goals, provided you invest for atleast 3-5 years.

Another advantage that ELSS tax saving mutual fund offers over other tax-saving avenues is the lowest lock-in period of three years from the date of investment. This gives the flexibility to investors to redeem or switch from their investments should they need. However, it must be noted that to enable the potential of wealth creation, investors should not redeem as soon as the lock-in is complete and stay invested for a longer term until his financial goals are achieved.

How much tax can ELSS tax saving mutual funds provide? While the actual tax benefit will vary between investors, you will be eligible for tax benefit if upto Rs.1.5 lakhs  a year.

If you are looking for higher returns in ELSS tax-saving mutual funds of 2021, examine not just the tax-saving mutual funds of 2020, but look at the historical returns across market cycles. Also, you can look at a direct plan option if you are looking for a lower expense ratio and thereby provide you with better returns over the long-term. Most fund houses offer a minimum investment amount of Rs. 500 that you can start as an SIP. Investors need to note that each SIP in a mutual fund has a lock-in of three years.

If you are looking to achieve your long-term financial goals and save tax to yet to reach the threshold limit of ¹1.5 lakh Section u/s 80C annual limit, these tax-saving mutual funds can be a good option to consider.

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