Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now

You can switch off notifications anytime using browser settings.
Stock Analysis, IPO, Mutual Funds, Bonds & More

Four commonly-held misconceptions about ELSS or tax saving mutual funds

ELSSs help investors to save taxes of up to Rs 1.5 lakh under Section 80C in a financial year.

ET Online|
May 02, 2019, 11.48 AM IST
Getty Images
Equity Linked Saving Scheme or ELSS may be the stepping stone to the stock market for many individual investors. However, many of them nurse a lot of misconceptions about these mutual funds that help investors to save taxes of up to Rs 1.5 lakh under Section 80C in a financial year. Here are a few common misconceptions shared by mutual fund investors.

ELSS funds are good only to save taxes
Sure, investments in ELSS mutual funds help you to save taxes under Section 80C of the Income Tax Act. However, that is not the only use of ELSS mutual fund schemes in your portfolio. Just like any other equity mutual fund schemes, you can use tax saving mutual funds to achieve your long-term financial goals. Remember, these schemes also invest their corpus in equity. Most of them follow a multi cap strategy. So, you can use them like any other equity schemes.

You should sell ELSS after three years
It seems, some investors just can’t see anything other than tax saving when they look at ELSS. All tax-saving investments permitted under Section 80C come with a mandatory lock-in period. ELSS mutual funds come with a mandatory lock-in period of three years, arguably the shortest lock-in period among the tax-saving options available under Section 80C. However, this doesn’t mean that you have to sell your investments as soon as the mandatory lock-in period is over. You are free to hold to your ELSS mutual funds as long as the scheme is performing well or you need the money to meet your goal.

You should invest in the same ELSS
Another common notion many mutual fund investors have is that they have to continue investing in the same ELSS fund to claim tax deduction year after year. Remember, the basic tax-saving premise is simple: your investments in ELSS funds qualify for tax deductions of up to Rs 1.5 lakh in a financial year. That means you are free to change or even invest in multiple schemes to claim tax deductions. There is stipulation that you have to invest in the same scheme year after year to claim the tax deduction.

Recycling ELSS funds is a great strategy
Some investment geniuses believe that selling ELSS mutual funds immediately after their mandatory lock-in period of three years and investing it again in ELSS funds is a great way to save taxes. They say the strategy helps you to save taxes without making extra investments. However, the strategy often backfires. Many investors stop saving/investing separately for the tax saving purpose and end up spending the money. It can have a huge impact on your long-term wealth creation.

Also Read

What are the advantages of investing in ELSS?

Can I shift money from non-ELSS funds to ELSS funds to claim tax deduction?

Using dips to invest in ELSS

Equity Linked Saving Scheme (ELSS)

Is it possible to stop my SIP investment in an ELSS?

Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links

Follow us on

Download et app

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service