To be able to build a secure and prosperous future, investing wisely is essential. Equity Linked Savings Scheme (ELSS) funds have gained significant attention as an effective tool for wealth accumulation. Consider ELSS Mutual Funds if you want to invest money for the long term. It is a type of financial investment (SIP) or mutual fund that offers investment growth and tax benefits.
This article explains vital information for investors considering investing in ELSS. Ultimately, you will know why ELSS funds might be a good choice for your long-term financial goals.
What are ELSS Funds?
This is a special kind of mutual fund that invests in stocks or equities at the primary level. ELSS can offer higher returns than traditional investments and are preferred due to their tax advantage.
Benefits of Equity Linked Savings Scheme (ELSS)
ELSS has risks like other mutual funds or SIPs. However, it has several benefits, making it the most popular pick among investors. The following are some of the most prominent benefits of ELSS you can enjoy.
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Saving Good on Taxes
One of the major advantages of the ELSS is that they provide tax benefits under Section 80C of the Income Tax Act. This means the amount you invest in ELSS funds, up to a certain limit, is usually deducted from your taxable income. It is a great way to save on taxes and grow wealth over time.
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Capability to Achieve Higher Returns
These are equity-based funds, which means they invest in the stock market. The stock market is much more unpredictable in the short term. In saying that, it has historically provided higher returns over the long term than fixed deposits or bonds. However, you should note that higher returns also come with higher risks. So, it is essential to be prepared for market fluctuations.
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Lock-In Period
ELSS funds come with a lock-in period, which means you cannot withdraw your invested money for a certain period. This lock-in period is three years. This facility helps with your long-term investments. It also helps you stay rigid to your financial goals for the longest time. Additionally, it restricts you from making quick decisions depending on short-term market movements.
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Flexibility of SIP
An SIP is a way to invest regularly. It allows you to invest a fixed amount of money at regular intervals (monthly). SIPs bring discipline to your investment journey and help you take advantage of rupee cost averaging. You can buy more units for the same money when the markets are down. This may increase your returns when the markets recover.
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Diversification
This scheme primarily invests in various stocks from different sectors and industries. Its diversification helps in distributing the risk it comes with. If one sector underperforms, the impact on your overall investment is reduced because of the presence of other sectors that might perform well. Diversification contributes to stabilising returns.
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Long-Term Wealth Creation
ELSS funds are ideally suited for long-term financial goals like retirement planning or buying a house. Keeping your money invested for longer has more opportunities to grow big. The power of compounding comes into play, where your earnings start earning, leading to potentially substantial wealth creation over the years.
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Liquidity After Lock-In
Once the lock-in period of three years is over, the scheme offers liquidity. This means you can withdraw your money if you need it. This liquidity and the potential for higher returns make ELSS a flexible option for long-term investing.
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Management via Professionals
These funds are managed by experienced fund managers who make investment decisions on your behalf. Their expertise in analysing the market and selecting the right stocks can potentially enhance the performance of your investment.
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Low Minimum Investment
ELSS have a relatively lower minimum investment requirement than other investment options. This accessibility makes them suitable for investors with varying budget sizes.
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Tax-Free Returns
Apart from the initial tax benefits, ELSS offer tax-free returns upon redemption. This means the profits you earn from your ELSS investments are not subject to additional taxes, allowing you to keep more of your returns.
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Long-Term Stability
Investing in an Equity Linked Savings Scheme requires a longer commitment, which can shield your investments from short-term market volatility. This stability is especially advantageous when aiming for long-term financial goals.
What Should You Take Into Account Before Investing in an Equity Linked Savings Scheme?
While ELSS funds offer numerous benefits, keeping a few things in mind is essential. This is especially required as you invest your hard-earned money for a long time.
- Risk Tolerance: ELSS funds come with market risk. Ensure you are comfortable with the continuous ups and downs of the stock market.
- Long-Term Commitment: Remember that ELSS has a three-year lock-in period. Be ready to stay invested for this period or longer.
- Diversification: Although Equity Linked Savings Scheme diversifies your investment, it is a good idea to spread your investments across different asset classes for better risk management.
Key Takeaways
ELSS mutual funds are a good option for long-term investors looking forward to the growth of their invested money and enjoying tax benefits. ELSS funds can help you achieve your financial goals as they can provide higher returns, give tax advantages, and keep you in the discipline of long-term investing. Evaluate your risk tolerance, consider the lock-in period, and diversify your investments. Always take advice from a financial advisor, without fail, before making any investment decisions.
