Mutual Funds

Why ELSS is the best tax-saving option for you

Many taxpayers are busy finalising their tax-saving investments these days. With barely two months to go before the end of the financial year, many of these individuals choose an option out of habit or on recommendations of someone (sometimes a qualified person) they would tell you why you should consider investing in Equity Linked Saving schemes (ELSS) or tax-saving mutual fund schemes this year.

Sure, we deal with only mutual funds. However, that is not the reason why we are recommending mutual fund schemes to save taxes this year. Here are some reasons why we believe ELSS mutual funds are the best tax-saving option for you.

You would have heard many times that an ELSS has the shortest lock-in period among the tax-saving options available under Section 80C. However, this is not the reason why we would like you to consider investing in tax-saving mutual fund schemes. Of course, these mutual funds have the shortest mandatory lock-in period of three years. That means they offer you an exit window if you are hard-pressed for money. However, you should always invest in these schemes with an investment horizon of five to seven years.

They can be your stepping stone to the stock market. Many taxpayers start with a tax-saving mutual fund schemes and graduate to other equity mutual fund schemes later. The process helped most of them to find the best way to create wealth over a long period. Yes, probably you know it already that stocks have the potential to offer higher returns than other asset classes over a long period.

The mandatory lock-in period of three years helps many investors get used to volatility, typically associated with investing in stocks. Many first-time investors get nervous when they see their investments lose value sharply. Their first instinct is to run away from the stock market.

However, because of the mandatory lock-in period, they are forced to continue with their investment. Once they see their investment regain the value after some time, they gain some confidence. More such ups and downs in the market prepare them to be long-term investors. Investing for the long term is essential to create wealth from stocks.

That brings us to the most compelling reason why you should invest in ELSS: these mutual funds can help you to add more zeros to your corpus to take care of your long-term financial goals. Most safe tax-saving options are government-backed and they only offer modest returns. ELSS mutual funds, on the other, have the potential to offer double-digit returns over a long period. Sure, they have offered negative returns in the last one year, but that doesn’t take away their potential to offer superior returns over a long period.

Even after paying the long-term capital gains tax of 10 per cent on gains of over Rs 1 lakh in a financial year, these schemes may offer you better returns. For example, the ELSS category has offered an average return of around 15 per cent over five-year horizon and 17 per cent over 10-year period.

If you are thinking of investing in ELSS or tax saving mutual funds, here are our recommended schemes: Best ELSS or tax-saving mutual funds to invest in 2019

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