Mutual Funds: 5 ELSS funds have given up to 25% return in last 3 years

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Tax season presents an excellent opportunity to review your investment strategy and seek avenues to enhance wealth while reducing tax liabilities. In India, equity-linked savings schemes (ELSS) offer a compelling choice for investors aiming to optimize tax benefits alongside wealth creation.

Below is a table showcasing some of the top-performing ELSS funds that can significantly bolster your long-term investment portfolio.

Ironically, many investors hastily enter ELSS funds believing it’s merely another type of equity fund aimed at wealth creation, often overlooking the inherent benefits unique to each fund. Here’s why ELSS can be highly appealing:

Tax advantages

ELSS fund investments provide significant tax savings under Section 80C. Here’s an overview of the tax benefits:

  • Deduction of up to 1.5 lakh: Investing in ELSS allows you to reduce your taxable income by up to Rs. 1.5 lakh annually. Depending on your tax bracket, this can substantially decrease your tax liability.
  • Reduced tax obligation: Lowering your taxable income through ELSS investments results in overall reduced tax payments. This provides additional funds that can be reinvested or allocated towards achieving other financial objectives.

Potential for growth

The growth potential of ELSS is a significant advantage. Here’s a closer look at why:

  • Equity-focused: ELSS funds invest in stocks, offering the potential for higher returns compared to fixed-income tax-saving alternatives such as the Public Provident Fund (PPF) or National Savings Certificates (NSCs). Historically, the stock market has delivered strong long-term returns, making ELSS a preferred choice for wealth accumulation.
  • Long-term perspective: ELSS funds are typically recommended for an investment tenure of 5-10 years or more. This approach helps investors weather market fluctuations and capitalize on the compounding of returns over time.

Structured investing

Utilizing ELSS funds offers a method to instill regularity in your investment approach. Through a systematic investment plan (SIP), you consistently invest a predetermined amount, leveraging rupee-cost averaging. ELSS paired with SIPs thus form an effective strategy for cultivating disciplined investing habits.

  • SIPs promote consistency: Establishing a regular investment amount removes emotional decision-making, preventing the urge to invest more during market highs and less during lows.
  • Rupee-cost averaging: Through SIPs, you acquire units at various price levels over time, smoothing out the average unit cost despite market fluctuations.
  • ELSS lock-in period fosters a long-term perspective: The mandatory three-year lock-in period of ELSS funds deters impulsive reactions to market volatility, encouraging sustained investment for optimal returns typically associated with equities over the long run.

For investors with a long-term perspective (usually five years or more), the lock-in period and market volatility of ELSS funds become less worrisome as market fluctuations tend to stabilize over time.

Selecting the appropriate ELSS fund necessitates thorough research into its performance, investment approach, and risk characteristics. It should align closely with your overarching investment objectives.

By comprehensively assessing both the advantages and potential risks, you can confidently determine whether ELSS fits well within your investment portfolio.