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Investing in Tax Saving Mutual Funds? What You Need to Know

Tax Saving Funds or Equity Linked Savings Schemes (ELSS) are widely popular for their numerous benefits. If you don’t know much about these funds, go through this post to understand more about these mutual funds.

Mutual Funds (MF) come in many forms and types. Out of them, ELSS funds are one of the most popular types of funds. These offer good growth, diversity, and significant tax benefits. While these funds are quite easy to understand, some investors might find it investing, especially if they are relatively new in their investment journey. To help these investors, let’s discuss all that you may need to know before you begin your investment journey with ELSS funds.

What are ELSS Funds?

ELSS funds are like any other mutual funds; the only difference is they come with added tax benefits. Being equity funds, they invest 60% or more of its total fund pool in equity and the rest being invested in other debt instruments or the likes.

Tax Benefits on ELSS Funds

While there are several investment options one could choose to invest their money in, the main reason people opt for ELSS Funds is that they allow huge saving on taxes. Equity-Linked Saving Schemes (ELSS) can help taxpayers save up to Rs1.5 Lakhs in a financial year on taxes according to Section 80C, Income Tax Act,1961. This is a huge amount for anybody who’s a beginner in investments. However, there has to be a 3-year lock-in period to avail this tax benefit.

Types of ELSS Funds

ELSS funds can be divided into various categories based on various factors, such as:

  • Market Capitalisation: There are three types of funds to choose from; large-cap funds, mid-cap funds, and small-cap funds. Mid-cap funds and small-cap funds invest majorly in mid-cap and small-cap stocks and hence could offer high returns but also come with higher risk. Large-cap funds are generally preferred by investors with lower risk appetite.
  • Returns: Growth and dividend funds are two types of funds to choose from here. Growth funds re-invests the returns generated by the fund periodically. Dividend transfers the returns in the account of the investor.

 

How to Invest?

The first step in investing is to understand the schemes inside out and knowing what you’re getting into. Just like other types of mutual funds, there are two primary ways to invest in ELSS funds too – lump sum and SIP.

SIP allows you to invest a small amount (starting as low as Rs 500). You could set a SIP amount periodically, or invest different amount each time according to your preference.

Tips to Begin Your Investment Journey with ELSS Funds

  1. Set Goals: You should always define your reasons for investment, how much you hope to earn, and in what time frame. This helps an investor decide how to split their investment and how much risk they are willing to undertake.
  2. Keep Your Documentation Updated: Before investing, you might be asked to submit several government-authorised documents for the KYC (Know Your Customer) process. For investing in tax saving mutual funds, you will usually be asked to submit your PAN card, address proof and updated bank statements.
  3. Choose the Right Fund and Reliable AMC: Scout through various options and choose a fund that suits your requirements. Make sure you look at the past few years of records when evaluating a fund. Also, the Asset Management Company (AMC) that handles the fund on your behalf is crucial too. Choose a fund house that comes with years of experience.

Mutual fund investments, especially ELSS funds, are lucrative for beginners as they can increase your wealth while saving a considerable amount of taxes. However, gaining ample knowledge about the market is essential for a successful investment journey.

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