Who should invest in (ELSS) Tax Saving Mutual Funds?

Tax Saving Mutual Funds or Equity Linked Savings Schemes are diversified equity funds that provide tax deduction benefits under Section 80C of the Income Tax Act. Hence, ELSS funds are suitable for any taxpayer who is willing to take the risk of an equity-oriented tax savings instrument. ELSS funds are better suited for the salaried class as they have a regular source of income and need to make tax saving investments every year. In fact, they can conveniently invest in ELSS through SIP on a monthly basis to benefit from rupee cost averaging. 

If you are a young taxpayer, you can take advantage of the dual benefit of investing in ELSS i.e. avail tax deduction under section 80C and the growth potential of equities over a long-term by investing every year in ELSS. While older taxpayers can also invest in ELSS to avail tax benefit, the equity risk inherent in ELSS demands a longer investment horizon which they may lack. 

Remember, ELSS funds have a lock-in period of 3 years. If you invest today, you can take your money out only after 3 years in case of lumpsum investment. The lock-in period is also applicable to each SIP payment. If you want to withdraw the full amount invested over 12 months, you will have to wait till the last SIP instalment has completed 3 years. But It’s not just about staying put in the fund for the lock-in period but continuing with your investments beyond that to see the real growth potential an ELSS can offer.

A young taxpayer with many decades of working life ahead of him/her can leverage the dual advantage of an ELSS better compared to someone who may be close to retirement. But even with 5-7 years left for retirement, one can consider ELSS as an option if he/she has the desired risk appetite. Thus, ELSS can be your preferred tax saving option depending on your age, risk preferences and other liabilities like home and education loans that make the old tax regime more appropriate for you.