Early on in work and financial life, as you set up your own establishment, meeting numerous needs with limited pay is by itself a challenge. Thus, even small tax payouts can make a big difference. At the same time, making even small and regular tax efficient investments such as those in tax saving mutual funds like ELSS, with ELSS full form being Equity Linked Savings Scheme, can make a big difference. Before we discuss how, here is a brief primer on ELSS mutual funds.

ELSS Primer

ELSS mutual funds are like other equity mutual funds where the investors’ money is invested in equities. At the same time, they have the following distinct features.

Tax deduction Investments in ELSS mutual funds qualify for annual tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. After marriage, if couples wonder how to save tax, the good news is that both spouses can individually claim the tax deduction till the limit for ELSS investments.

Long term growth potential Like investments made directly in equities and all equity mutual funds, despite experiencing market turbulence in the short term, ELSS investments have the potential to provide higher returns in the long term i.e., 8-10 years, or more.

While most individual investors are likely to find investments in high priced blue chip stocks difficult to make, by buying mutual fund units they can reap the benefits of the growth of top companies.

Access to fund manager expertise While all mutual fund investors get the benefit of the expertise of fund managers, the outcomes for equity mutual funds like ELSS funds tend to be more pronounced in the long term. This is due to their potential for high returns. This is important as individual investors typically do not have the time or the expertise to invest directly in stocks.

Three year investment lock in Every investment in ELSS mutual funds has a lock in period of 3 years i.e., the investment remains inaccessible for 3 years. This lock in goes a long way in helping investors get the most out of the long term potential for high returns of ELSS.

Convenience of regular investments You can make regular investments in ELSS funds with SIP, with the SIP full form being Systematic Investment Plan. For those in their first jobs or early work life who wonder about how to save tax, a predetermined amount can be fixed for investment in ELSS through SIP. The SIP investment amount will be deducted from the bank salary account on a particular day of the month.

How ELSS Helps Young Investors

Make regular tax saving investments With SIP investment in ELSS funds, one can instil an investment discipline of year round tax saving investments. This spares you from savage take home pay cuts at the end of the financial year. As per the Income tax rules, investments in ELSS Fund or Equity Linked Savings Scheme are eligible for tax deduction under Section 80C. You can claim a deduction of up to Rs 1.5 lakh for investment in Equity Linked Savings Scheme and save tax up to Rs 46,800. You should know that ELSS comes with a lock-in period of 3 years, you cannot redeem it before 3 years.

With SIPs, you buy more units when the markets are low and less when the markets are high. Over time, this reduces the cost of buying units and you gain when the markets appreciate in the long term.

Invest for long term goals The three year lock in, along with the need to stay invested in ELSS for the long term to make the most of equity mutual fund investing, makes it an attractive candidate for long term goals like children’s higher education and retirement. The potential for long term growth from ELSS can help investors save large amounts required for such goals.

Attractive first equity investment Providing a combination of tax savings with potential high growth, ELSS can be a great first step to equity investments. What is more, young investors can begin with amounts as low as Rs 500.

How To Get Started with ELSS Investments

Determine amount of tax saving investments At the beginning of the financial year, determine whether for the you will adopt the Old Tax Regime or the New Tax Regime. The Old Tax Regime provides for annual tax deduction for eligible items of up to Rs 1.5 lakh under Section 80C while New Tax Regime provides no tax deduction. Naturally, you will opt for the system with lower tax outgo. For this exercise, you may engage a tax professional or a financial planner.

Calculate tax saving investments This involves deducting from the upper limit of annual tax deduction of Rs 1.5 lakh eligible items like provident fund contributions, home loan principal repayment and children’s tuition fees.

Earmark ELSS for long term goals Most eligible tax saving investments are typically long term investments with restrictions and penalties on premature access to money besides being low risk, low return investments. ELSS is one of the few options high risk options with a potential for high returns in the long term. This is likely to also make ELSS mutual funds the best tax saving mutual funds for long term goals.

Determine SIP amount You can arrive at the amount using Systematic Investment Plan calculator or SIP investment calculator, commonly available online. Else, you can engage a mutual fund advisor with a track record for credible quality service and advice to help you.

Identify the right ELSS To identify the best ELSS mutual funds or best ELSS funds, you can take the help of a mutual fund advisor. You can search for “mutual fund advisor near me” on your mobile device. To arrive at the best ELSS mutual funds, among other things, compare fund returns over different periods such as 1, 3 and 5 years with scheme benchmarks and other ELSS funds.

For many people, pay taxes and even making tax saving investments. are an unavoidable pain. However, tax saving mutual funds like ELSS can help young investors and those in early work life, turn them into a lifelong advantage.