For investors prioritizing growth while saving tax, Equity Linked Savings Schemes (ELSS) are increasingly gaining popularity. Their long-term growth potential and short lock-in period of just three years make them a compelling choice for mutual fund investors.
Interestingly, ELSS funds have a track record of outperforming traditional tax-saving instruments. With a wide range of benefits, these funds stand out as a strategic avenue for wealth creation.
Let’s find out how strategic investments in ELSS mutual funds can maximize your returns.
What are ELSS funds?
ELSS funds are a popular category of mutual funds in India that primarily invests in equity shares of companies. Investors going for these funds are eligible to claim deductions up to INR 1.5 lakhs under Section 80C of the Income Tax Act annually.
For ELSS funds, the mandatory lock-in period is 3 years. Interestingly this is the shortest among tax-saving options under Section 80C. While some fixed deposits do offer tax benefits, they come with a lock-in period of five years.
ELSS funds bring the opportunity for capital appreciation. This makes it an ideal choice for investors who look to diversify their portfolios with equity investments and at the same time, reduce their tax liabilities.
How to get the best from ELSS Funds?
Here are five golden strategies to make the most of ELSS funds.
1. Optimize Tax Savings
Invest in ELSS funds to maximize tax benefits under Section 80C. With a short lock-in period of three years, these ELSS funds offer potential tax savings of up to INR 46,800. You can simply invest in MF through the reputed platform, Dhan, exploring the best-performing ELSS funds.
Incorporate this category of funds into your tax planning strategy to effectively reduce your taxable income while generating higher returns compared to other tax-saving options.
2. SIP and SWP Strategies
Start a SIP in ELSS to create long-term wealth. After the three-year lock-in period, create a Systematic Withdrawal Plan (SWP) to receive a steady stream of income without making any additional contributions.
With this strategy, you can withdraw from investments that you made three years ago. Creating a SWP from ELSS funds ensures financial sustainability and optimizes your benefits under Section 80C.
3. Tax Gain Harvesting
Seasoned investors deploy a strategy in ELSS funds, called tax gain harvesting. This tactic involves selling units of the fund that have undergone value appreciation. In the process, you can realize a profit of up to INR 1.25 lakh, which is tax-free. This strategy prevents the profit margin from exceeding INR 1.25 lakh, beyond which you need to shell out a tax of 12.50% on the gains.
Now, repurchase units of the same ELSS, or a similar one, using these gains to maintain the overall position. Note that this is not ideal in the long run and may require timing the market. Thus, it is not suitable for beginners.
4. Align Your Investments with Goals
Consider your financial goals while investing in ELSS mutual funds. Since these funds come with a lock-in period of three years, you can plan your goals accordingly. Historically, ELSS funds have returned an attractive CAGR, which makes them suitable to achieve your financial goals within a similar timeframe.
5. Select Best Performing Funds
Based on a comprehensive analysis of factors like historical returns over the last five to ten years, choose the best ELSS funds on Dhan. Consider the expertise of the fund manager, portfolio allocation, expense ratio, and risk measures while choosing these mutual funds.
Compare these metrics against the standards and other funds to find the ones that are likely to deliver maximum returns.
Conclusion
If you are looking for a suitable fund that delivers tax benefits as well as growth, ELSS funds are ideal for you. In this blog, we have recommended the golden strategies to make the most of ELSS mutual funds. Based on your needs, you can make the choice on which ELSS fund to invest in.
