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.