Finance & Loans

Blowing Up Popular Myths About ELSS Funds

If you are good at financial planning, then you are less likely to deviate from achieving your ultimate financial goal. And when it comes to tax planning you need to have the same approach. Planning on saving your hard earned money from getting taxed is equally important because why do you want to give your money to the government? These days, ELSS is on the top of the list of taxpayers because of the several benefits that it offers. Not only does ELSS give investors a chance to gain exposure to the stock market, but it also helps them bring down their tax liability.

Today we are discussing ELSS and also blowing up misleading myths about the tax saver fund.

What is an ELSS scheme?

Equity Linked Savings Scheme or ELSS as it is commonly referred to as is an open ended tax saving scheme that comes with a predetermined lock in period and a tax benefit. Historically, ELSS has outperformed every other tax saving instrument and generated some decent returns for investors. Investors can save up to Rs. 46,800 in taxes by investing Rs. 1.5 Lac every fiscal year in ELSS funds.

Here are a few myths about ELSS funds that aren’t true at all –

You cannot invest more than Rs. 1.5 Lacs in ELSS

Do remember that ELSS is an equity mutual fund. It does offer a tax benefit for investments up to Rs. 1.5 Lac under Section 80C of the Indian Income Tax Act, 1961. But that does not mean you cannot invest more than that. Investing in equity mutual funds with a long term investment horizon can not only mitigate one’s investment risk but also give them an opportunity to earn long term capital appreciation. Investors can invest any sum in ELSS that is suitable for their financial goal, their risk appetite, and investment time horizon. There is no upper limit for ELSS investments.

You will have to pay a high entry load and fund management price

Although it is true that back in the day investors had to pay a hefty entry load charged by the AMC to initiate mutual fund investments, until 2009 when SEBI abolished all entry loads. Having said that, some mutual fund schemes still have exit loads.  However, exit load is not applicable to a tax saving equity scheme like ELSS that has a predetermined lock-in of three years. On the other hand, by law, the expense ratio of mutual fund schemes is capped at 2.25%. This means that AMCs cannot levy an expense ratio on any mutual fund exceeding the aforementioned percentage.

You must redeem your investments after 3 years

ELSS has the shortest lock-in of 3 years as opposed to other tax-saving instruments under Section 80C. However, that does not mean that you should withdraw your ELSS investments after the lock in period. If you do not need the surplus that you have accumulated in the ELSS fund, you can choose to remain invested. This will only grow your corpus as your investments may continue to accrue interest as long as you are invested. You can even consider ELSS for tending to long term financial goals like retirement planning.

You need to large sum to invest in ELSS

Unlike other tax saving instruments where you need to have a large surplus to make an investment, you can start small in ELSS with SIP. Systematic Investment Plan allows taxpayers to invest an amount as low as Rs 500 every in ELSS funds. They can even use SIP calculator, to determine the total returns that their investments can help them fetch in the long run.

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