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What are ELSS or tax saving mutual fund schemes?

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Last Updated: May 27, 2020, 05.03 PM IST
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Summary Tax saving schemes are mutual fund schemes that qualify for tax deductions under Section 80C of the Income Tax Act.

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Tax-saving under Section 80C
Tax saving schemes are mutual fund schemes that qualify for tax deductions under Section 80C of the Income Tax Act. These schemes are also known as Equity Linked Saving Scheme (ELSS) or tax planning or saving mutual funds. Investors can park money in these schemes and claim tax deductions of up to Rs 1.5 lakh under Section 80C.

ELSS or tax saving mutual funds come with a mandatory lock-in period of three years. Though these schemes have a short mandatory lock-in period, it is always better to invest in them with an investment horizon of at least five to seven years. This is because these schemes invest most of their corpus in equity or stocks. And stocks can be extremely risky and volatile in the short term. If you invest for a relatively longer period, these schemes have the potential to offer superior returns than other tax saving investments permitted under Section 80C.

Most tax-saving investments allowed under Section 80C are government-backed schemes that offer modest returns.

Many mutual fund advisors believe that ELSS is the best way to get into the world of equity mutual funds. They say that because of the mandatory lock-in period of three years, most investors learn about the volatility and risk, typically associated with equity mutual funds. Once they stay through a volatile or rough patch in the market and pocket good returns from ELSS funds, they start investing in other equity mutual funds.

Though ELSS investments are primarily made to save taxes, investors can assign them to their long-term goals. Since these schemes follow a multi cap investment strategy, investors can treat them like any open-ended multi cap mutual funds after the mandatory lock-in period. Investors need not rush to sell their ELSS investments soon after the mandatory lock-in period is over. Investors can hold on to their ELSS schemes as long as they are performing well.

The ELSS mutual fund category offered around 8.46% over 10 years.

If you are looking to invest in ELSS funds to save taxes this financial year, here are our recommended ELSS mutual funds.

Best ELSS to invest in 2020

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