Can tax saving mutual funds help you to achieve your long-term financial goals?

Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund scheme that can allow an investor to save tax and also generate good returns. You can claim an ELSS tax benefit up to Rs.1.5 lakh in a financial year under Section 80C of the Income Tax Act. Besides, ELSS funds have the lowest lock-in period of three years compared to other investment products under Section 80C.

While comparing ELSS v/s mutual fund schemes, ELSS is regarded as more beneficial fornew investors as it canserve as a stepping stone into the world of equity mutual fund investments.

In this article, we look at how ELSS funds can help you achieve your long-term financial goals.

Mutual fund advisors believe investors must not withdraw their funds from an ELSS scheme after the completion of the mandatory lock-in period, even if the fund is performing well. As most ELSS schemes follow a multi-cap strategy, they are comparable with multi-cap funds over the long run and can be used to meet long-term investment objectives.

Let us take an example to understand this better.

To check the performance of ELSS funds against multi-cap funds we compare returns over three different time horizons. The investment horizons taken are lock-in period of three years, five years and seven years. As most mutual fund experts suggest investing in equity funds for a long-term horizon of five to seven years, we use these investment horizons in our example.

To assess performance, we use rolling returns, for the time horizons, as mentioned earlier, over 15 years.

The average of a series of returns over a long-term period is known as rolling returns.

Rolling returns (%)
3-year 5-year 7-year
ELSS 16.29 16.47 15.38
Multi-cap funds 16.39 16.86 15.78

The returns over the years make it evident that ELSS funds are as good as any other multi-cap scheme to invest for an extended duration and achieve financial objectives. If you have a moderate risk appetite, you can invest in an ELSS scheme and even claim a tax deduction on your investment.

However, it is advisable to not include more than two to three ELSS funds in your investment portfolio. There is a chance the stock holdings may overlap each other, which can negatively impact your overall returns. Besides, investing in ELSS should not be done in isolation. Keep track of the equity allocation of your portfolio. It is always a good idea to select schemes that align with your risk profile.

Conclusion

You can invest in mutual fund schemes such as ELSS to claim ELSS tax exemption under Section 80C of the Income Tax Act up to Rs.1.5 lakh in a financial year. Since ELSS tax saving funds follow a multi-cap strategy of investing, they can help you achieve your long-term financial goals. However, the key to building wealth is to ensure you do not withdraw your funds after the mandatory lock-in period, but continue to stay invested for a while.

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