Five commonly-held misconceptions about ELSS or tax saving mutual funds
Tax saving investments play a pivotal role in an investor’s overall investment plan. These investment tools can help investors systematically achieve their long-term financial goals. However, certain myths can come in the way of sound decisions and cloud an investor’s judgement. Common misconceptions could compromise investors’ objectives from meeting their investment goals.
Here we look into the five general mistakes you can avoid regarding ELSS funds or tax saving mutual funds.
- ELSS helps to save taxes and more
ELSS helps you save on tax up to Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961. However, this is one of the many benefits offered by ELSS. Similar to other equity mutual fund schemes, ELSS can also be used to meet your long-term financial goals as they invest in equity funds. Additionally, most ELSS mutual fund tax saver plans follow a multi-cap strategy and can be used just like any other equity scheme.
- ELSS should be redeemed after three years
ELSS tax saver mutual fund has a mandatory lock-in period of three years, which is the lowest compared to other Section 80C products. Many investors, especially beginners, assume that ELSS investments must be sold as soon as the lock-in period ends. On the contrary, you can stay invested in ELSS for as long as you want subject to the fund’s performance.
- Always invest in the same ELSS mutual fund
A common myth among investors is that to claim a tax deduction every year they must continue to invest in the same ELSS funds. It is worth noting that all investments made in ELSS funds qualify for a deduction up to Rs.1.5 lakh under Section 80C. This means you can invest in multiple schemes or even switch from one scheme to another to claim the tax deduction.
- Recycling ELSS funds is good
Some investors believe it to be a good strategy to sell ELSS funds after the lock-in period ends, and reinvest to save taxes. However, this strategy may not work if investors decide to use the money to pay for an expense rather than reinvest. This can come in the way of achieving their financial objectives.
- ELSS requires lumpsum payments
It is a popular myth amongst novice investors that a lumpsum amount is needed to invest in ELSS. Also, they may assume that ELSS funds offer a limited open-period for investments. In reality, investments in ELSS can be made via small regular SIPs starting as low as Rs.500.
Being aware of the myths can help you invest smartly and focus on reaping maximum returns from your investments. It is advisable to invest in tax saving instruments at the beginning of the financial year.