Common misconceptions about ELSS or tax saving mutual funds

The Equity Linked Saving Scheme or ELSS can step into the stock market for many individual investors. However, many of them have a lot of misconceptions about these mutual funds, which help investors save taxes up to Rs 1.5 lakh in a financial year under Section 80C. Here are some misconceptions shared by mutual fund investors.

ELSS funds are only good for saving tax: 

Certainly, ELSS mutual fund investments help you save taxes under Section 80C of the Income Tax Act. Nevertheless, this is not the only use in your portfolio of ELSS mutual fund schemes. Like any other equity mutual fund schemes, you can use best tax saving mutual funds to achieve your long-term financial objective. Note these schemes invest their corpus in equity. Most of them follow a multi-cap strategy. And like any other equity schemes, you can use them.

After three years, you can sell ELSS

It seems, when they look at ELSS, some investors cannot see anything other than just tax savings. All tax-saving mutual funds investments under Section s80C made with the mandatory lock-in period. ELSS mutual funds come with a three-year compulsory lock-in period, perhaps the shortest lock-in period among the tax-saving options available under Section 80C. Furthermore, this does not mean that you need to sell your investment as soon as the mandatory lock-in period ends. You are free to keep your ELSS mutual fund as long as this scheme performing well or you need funds to meet your financial goal, you are free to occupy your ELSS mutual fund.

Investment in the same ELSS

Another common misconception that most mutual fund investors make is that they must keep investing in the same ELSS fund throughout the year to claim the deduction. Remember, the basic tax-saving premise is simple: in a financial year, your investment in ELSS funds is eligible for a tax deduction of up to Rs 1.5 lakh. It means that you are free to change or invest in many schemes to claim the tax deduction. It concludes that you should invest year after year in the same plan to claim the tax deduction.

A great strategy is to recycle ELSS funds

Many investment talents claim that selling ELSS mutual funds immediately after the mandatory lock-in period of three years and reinvesting it in ELSS funds is a great way to save taxes. They say that the strategy will help you save taxes without making any additional investment. However, the procedure often backfired. For tax saving purposes, most investors stop saving / investing separately and spend money. It can have a massive impact on your long term wealth creation.

Note: Equity Linked Saving Scheme (ELSS) mutual funds come with a lock-in period of three years. If you have a SIP running in ELSS mutual funds and need to stop it, you can do so. However, in the case of ELSS mutual funds, it is not possible to redeem existing invested units before three years from the date of investment.


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