A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Who should invest in tax-saving mutual funds?
Tax savings funds
or share-linked savings schemes are diversified equity funds that provide tax deduction benefits under Section 80C of the Income Tax Act. Therefore, ELSS funds are suitable for any taxpayer willing to take the risk of an equity-oriented tax savings instrument. ELSS funds are more suitable for the wage-earning class as they have a regular source of income and have to make tax-saving investments every year. In fact, they can conveniently invest in ELSS via SIP on a monthly basis to benefit from the average costs of rupees.
If you are a young taxpayer, you can take advantage of the double benefit of investing in ELSS, i.e. taking advantage of the tax deduction under Section 80C and the long-term growth potential of stocks by investing in ELSS every year. While older taxpayers may also invest in ELSS to take advantage of tax benefits, the equity risk inherent in ELSS requires a longer investment horizon that may be missing.
Remember, ELSS funds have a 3-year lock-in period. If you invest today, you can only take away your money after 3 years in case of a lump sum investment. The blocking period is also applicable to each SIP payment. If you want to withdraw the full amount invested in 12 months, you will have to wait until the last SIP installment has completed 3 years. But it’s not just about staying in the fund for the lock-in period, but continuing with your investments beyond that to see the real growth potential an ELSS can offer.
A young taxpayer with many decades of working life ahead of him can better exploit the double advantage of an ELSS than someone who may be close to retirement. But even at 5-7 years after the end of retirement, you can consider the ELSS as an option if you have an appetite for the desired risk. Therefore, ELSS can be your preferred tax saving option depending on your age, risk preferences, and other liabilities such as home loans and education that make the old tax regime more appropriate for you.