Pros and Cons of ELSS Funds

Earlier, we looked at the pros and cons of tax-saving fixed deposits. Another popular tax-saving alternative under Section 80C is mutual funds. These tax-saving mutual funds are known as Equity Linked Savings Schemes (ELSS). ELSS funds are widely-used to save taxes but a lot of people make rushed investments in them in the last financial quarter of the month. To get the best out of tax-saving mutual funds, an investor needs to understand their pros and cons.

Pros of ELSS funds

  • Lowest lock-in of 3 years among tax-saving options
  • Can earn returns that are higher than the rate of inflation
  • Earnings upon expiry of lock-in period are 100% tax-free
  • Earn from the power of compounding interest
  • Invest through SIPs to buy at different levels of the market
  • Stop and start SIPs at any time you want
  • No maximum limit to invest
  • Individuals and HUFs can invest

Cons of ELSS funds

  • Difficult to decide which fund to invest in
  • High amount of documentation at first
  • No guaranteed returns because ELSS funds are subject to equity market-related risks
  • Most mutual fund companies are currently not accepting investments from NRIs in US and Canada
  • No premature withdrawals allowed

ELSS funds have their pros and cons, but one cannot ignore the fact that they are the only tax-saving investment that have the ability to generate high returns over the long-term. An investor might not consider exhausting their entire 80C limit by investing in ELSS funds, but a major part of your portfolio should be allocated to them to allow you to beat inflation over the long-term.

Find out the other tax-saving options that you can use to save taxes under Section 80C.

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