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The Beginner's Guide to ELSS Mutual Funds: What You Need to Know?


An opportunity where you can invest your money wisely, along with saving taxes, is exciting. Mutual funds offer one such opportunity, specifically ELSS or Equity Linked Savings Schemes.
 

ELSS mutual fund is a dynamic tax-saving option in finances; decoding its working could make it easier for beginners. But some questions prevail. How could your investment in the ELSS mutual fund help you long-term? How does it differ from other mutual funds? These are some of the most common questions every beginner investor faces.
 

Our blog aims to provide a beginner's guide to ELSS mutual funds that leads you through the key concepts and strategies so you can navigate the investment world confidently.
 

Understanding ELSS Mutual Funds

Equity Linked Saving Schemes are among the most popular mutual funds. These fall under the equity funds category since you invest predominately in equities.
 

A prominent feature of ELSS mutual funds is that you can claim deductions on the invested amount up to a specific limit under Section 80C of the Income Tax Act.
 

Another aspect that we must evaluate is that they have a mandatory lock-in period of 3 years. This means you cannot withdraw or redeem your investment during that period. It primarily helps you in generating substantial growth over a longer period.
 

While investing in ELSS is an excellent way of diverting your investing portfolio and gaining tax benefits, it does come with market risks. Moreover, ELSS is a mixture of tax-saving mutual fund and investment growth; hence, it benefits greatly with your financial goals.
 

How Do ELSS Funds Differ from Other Mutual Funds?

There are significant differences between ELSS funds and other mutual funds. 
Here are some factors that differ ELSS funds from other mutual funds:
 

  • Tax Benefits

    A major differentiator is that ELSS is a tax-saving mutual fund, unlike other mutual funds. This allows investors to reclaim up to ₹ 1.5 Lakh from their taxable income.
     

  • Lock-In Periods

    ELSS funds have a mandatory lock-in period of three years. Whereas other mutual funds may not have any lock-in period, allowing investors to withdraw their invested money anytime.
     

  • Investment Objective

    Investing in ELSS funds is to provide long-term capital. Hence, the primary objective of ELSS funds is to allocate 80% of their assets to equities. Other mutual funds have different investment objectives, such as generating income or balancing growth and income.
     

  • Systematic Investment Plan (SIP) Benefits

    ELSS funds allow investors to indulge in SIPs where they can invest a specific amount at specific intervals, monthly or quarterly. At the same time, SIPs affiliated with other mutual funds are less lucrative since they lack the tax-benefits.
     

    These were a few factors that make ELSS tax saving mutual fund stand out from other mutual funds. Knowing these differentiating factors is quite important for a beginner interested in investing.
     

Eligibility and Tax Benefits of ELSS Investments

There is still a lack of clarity amongst potential investors regarding whether they are eligible to invest in ELSS and the various tax benefits available. Let's understand this:
 

Eligibility
 

  • Individual Investors.

    Both individuals from India or an NRI are eligible to invest in ELSS. However, certain conditions surrounding the Foreign Exchange Management Act ( FEMA) must be considered for NRIs.
     

  • Taxpayer Status

    A major factor of ELSS funds is its tax benefits. Hence, the investor must be an income taxpayer in India to qualify for reclaiming your invested amount.
     

  • Minimum Investment.

    Another eligibility factor is that you must have a minimum amount as a principal. The minimum investment amount could differ from one type of ELSS fund to another and could be as low as ₹ 500.
     

  • KYC Compliances.

    A major eligibility criterion for investing in tax-saving mutual funds is completing your Known Your Customer (KYC) process.
     

Tax Benefits
 

  • There are tax deductions under Section 80C.

  • Long-term capital tax gains from mandatory lock-in period.

  • ELSS mutual funds can pay the investors dividends under the dividend distribution tax (DDT).
     

Even though the eligibility and benefits of ELSS funds are always favourable for investors, you must remember that the Tax laws change occasionally.
 

How ELSS Funds Help in Long-Term Wealth Creation? 

Throughout this blog, we highlighted that investing in an ELSS fund can help create long-term wealth. So, let us see how that works!
 

  • It is an equity-based fund and naturally ensures higher returns than traditional fixed deposits.

  • ELSS funds help in long-term wealth creation because they hold the power of compounding due to their fixed period.

  • ELSS funds are professionally managed by managers who actively monitor the market, which reduces the risk and guarantees long-term wealth creation.

  • You can reclaim and reinvest your dividends, ensuring wealth creation in the long run.

  • The ELSS tax-saving mutual fund is one of the prominent ways of generating wealth in the long term.

  • ELSS funds are a disciplined way of investing your money, stopping you from backing out of the investment under impulsive decisions. This feature is of great help in ensuring you compound your money long-term.
     

Conclusion
 

In conclusion, this blog sheds light on ELSS investments and clarifies any doubts you may have had as a beginner.
 

Moreover, ELSS funds present a compelling opportunity to grow wealth while minimizing tax burden. Hence, by investing wisely, staying patient, and harnessing the power of compounding, you can unlock the full potential of ELSS funds and pave the way to financial success.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Can I Start Investing in ELSS Funds with a Small Amount?

ELSS is open to all budget sizes, where you can invest a relatively small amount. Incremental increments and lump-sum investments can help you start with a small amount.

What Makes ELSS Funds Attractive for Beginners?

The market-linked returns, flexible SIPs, diversification, and tax benefits are some factors that can be compelling to beginner investors.