Why Tax Saving Mutual Funds are a Great Way To Start with Equity

When people invest in equity or equity-related investments, they tend to be affected by short term fluctuations in the market. TV and newspapers headlines make it tough not to be. Market movements play chaos with the mental states of most investors.

So, is there any way out?

Yes, but chances are you probably think of them as some annual ritual rather than investments. You guessed it right, we are talking about the widely popular tax saving mutual funds – ELSS funds. Equity Linked Savings Scheme, also known as ELSS, are one of the investment options under 80C that invest predominantly in equity and equity-related securities. ELSS mutual funds are meant to provide deductions of up to Rs1.5 lakh among Section 80C of the Income Tax Act, 1961. An investor can save up to Rs46,800 by investing in these mutual fund tax saver. ELSS mutual funds serve the dual benefit of wealth appreciation and also works towards saving tax. ELSS funds are also accompanied with a lock-in period of 3 years, meaning you cannot touch your funds before the completion of 3 years. But how can they be useful?

This lock-in period of 3 years can prove to be a boon for an investor who is learning to give their equity investments the required time. You ask how? Investing in ELSS funds means the investment gets three years of uninterrupted time to grow. Even if the markets bounce around in the short-term duration, you can not do much about it and hopefully, you’ll learn to let your investments be. Equity markets have a tendency to show volatility in the short-term. Investors new to investing often get scared and tempted to exit their scheme to stop loss. However, what they don’t realise is that in an attempt to cut down their losses, they turn their notional losses into real losses by exiting the scheme. However, with ELSS funds, one would not have any other option but to ride the volaitility for at least 3 years. 

Starting your equity journey with these mutual funds tax saver is a smart way to learn about how to invest in equities for a longer duration. Remember, small steps have the potential to lead to big changes. ELSS funds are a great way to instil financial discipline among investors, which is very important while investing in the equity markets. These tax saving investments have also historically provided significantly higher returns with an average of 12% returns p.a. Although ELSS mutual funds have a lock-in period of just 3 years, experts often advise staying invested for a longer duration, say 7 years or more to fulfil their long-term financial goals. 

You can also invest in ELSS funds via a systematic approach, namely SIPs (Systematic Investment Plan). SIP is a way to invest in mutual funds. Happy investing!