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.