5 Things to know before investing in tax-saving mutual funds

Any investor would be happy if their investments would generate returns while helping them save tax at the same time. Investing is a great way to utilize idle funds to earn and generate wealth. When an investor sells their investments, at the time, the gains that they have made are subject to taxes. For investors looking to save tax while generating returns, tax saving mutual funds are one of the best investment options.

Investors can reap several benefits by investing in these funds, but before investing in them, there are some things that one must know.

Lock-in period

ELSS funds come with a lock-in period of three years. This means an investor can not redeem or transfer their units before the end of three years. After the lock-in period, an investor can choose to redeem the units or stay invested in them for longer. These funds have the lowest lock-in period out of the various tax saving investment options. Investors should consider this lock-in period while making financial and investment plans.

Asset composition

In an equity-linked savings scheme, the funds are pooled and invested in equity or equity-related instruments. The fund manager may also invest a small portion of the fund into fixed-income instruments. Investors must be aware of the assets in which their funds are being invested.

Risk

ELSS mutual funds are subject to market risks like other investments. These funds invest the money into equity and equity instruments. Equity investments are high-risk investments. Investor should carefully assess their risk profile before investing in an equity-related scheme. Although high risk is associated with high rewards, investing in a scheme that aligns with your financial goals and risk profile is essential. This avoids unnecessary stress and hasty investment decisions.

Investing through SIP

An investor does not require a large sum of money to invest in a mutual fund. Through SIP, one can begin investing with as little as Rs.500. SIP allows an investor to invest a small amount of money at periodic intervals. These intervals can be weekly, fortnightly, monthly, or quarterly. This removes the need to invest a lumpsum amount in one go. SIP offers several benefits as well, like, compounding, better cost price average and flexibility.

Tax savings

The most important feature of these funds is the ability to save tax. An investor can save up to Rs. 1.5 lakh in taxes under Section 80C of the Tax Act, 1961. The ability to save tax makes this a great investment option. Although no maximum amount can be invested, anything above Rs. 1.5 lakh is not exempt from taxation.

ELSS funds offer several benefits but to invest wisely, investors need to know these things before investing their hard-earned money.

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