What are the Most Common Misconceptions About Tax Saving Mutual Funds (ELSS Mutual Funds)

Equity Linked Saving Scheme is the most popular tax saving instrument. This popularity is justified by their performance. Under Section 80C investors can save tax up to Rs 1.5 Lakh. However, there are misconceptions regarding ELSS mutual

funds. The most common being:

ELSS Funds are only for saving tax

Yes, ELSS mutual funds are tax-saving instruments that qualify for deductions under Section 80C. But that’s not all. ELSS mutual funds are market-linked instruments and have an equity component to them. They are just like any other equity mutual funds. Most ELSS mutual funds follow a multi-cap strategy. Investors can consider investing in ELSS funds to achieve their long term financial goals. Therefore, do not think that ELSS mutual funds are only for tax saving purposes, they’ll help you in achieving your long term goals by contributing to higher portfolio returns.

Liquidate ELSS investments after three years

Most investors don’t see beyond the tax saving option in ELSS funds. All tax-saving options under section 80C come with a mandatory lock-in period. These lock-ins are usually long term like 10-15 years. However, the ELSS mutual fund is the only tax saving option that has the shortest lock-in i.e. 3 years. But, does this mean after completing 3 years, you sell them? The answer is NO. You can hold on to the fund as long as you want. At the same time, make sure the fund is performing well and is helping you in achieving your goal.

Invest in the same ELSS Mutual Funds

Another most common notion among the investors is that they should invest in the same ELSS mutual fund to claim a tax deduction. Firstly, there is no restriction as to the number of funds that you can invest in the same financial year. In other words, for the same year, you can choose multiple ELSS mutual funds rather than investing in just one. Secondly, even in the consecutive years of your investments, you are free to invest in any ELSS mutual funds.

Recycling ELSS investments

There are some investors whose investment strategy is to sell the ELSS funds immediately after their 3-year lock-in period and invest it again in ELSS mutual funds. They believe that this is a great way to save taxes. In their opinion, this strategy doesn’t involve making additional investments to save taxes. However, there are higher chances of this backfiring. There are high chances that you stop saving or plan to invest elsewhere, but you end up spending the money. This would have a great impact on your financial plans.

Conclusion

Do not overthink your decision to invest. Tax saving with ELSS funds is the best option available to investors. It has the lowest lock-in period and historically has given higher returns than any other tax-saving instrument. Yes, it comes with a certain risk, however, this can be addressed by investing for longer durations. Don’t push your tax planning to the year-end, start investing in ELSS funds through SIPs and avoid the last-minute hassles. Get the best tax savings advice at FinPlay.