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Equity Linked Saving Scheme (ELSS), simply a tax-saving equity mutual fund, that helps its investors save on taxes. But do you know, not only saving tax, but ELSS funds can help you accumulate wealth in crores!
Amazing! Let us explore how!
ELSS, The Tax Savior………..
ELSS is one of the financial instruments that fall under the category of Section 80C, of the Income Tax Act. This is the only mutual fund scheme that helps investors save taxes on their returns.
The best part about the ELSS fund is that it is an equity-oriented product, thus being a tax savior fund, it retains the potential to generate inflation-beating solid returns in the long term.
Prominent Features Of ELSS………….
Investors often confuse and consider that one cannot invest more than 1.5 lakh per annum in ELSS funds. While in reality, this is only half of the fact. there is no limit to the money you invest every year in ELSS funds. And the fact is, Rs 1.5 lakh is the upper limit for the tax exemption that you can claim under Section 80C in a financial year.
So basically, the rule is that to avail tax benefits from the ELSS fund, and investors must make sure that he doesn’t invest more than 1.5 lakh in his ELSS fund per annum.
Being a tax saver fund, ELSS too has a kind of lock-in period but the best part is it has the shortest lock-in period (3 years) among all the tax-saving instruments under Section 80C.
But that doesn’t mean that it’s necessary to redeem your ELSS schemes just after lock-in completion. Given its equity nature, if you can stay invested in ELSS equity funds for 10, 15, or even 20 years, the advantages can be huge and you can create a lot of wealth.
Wealth Equal To 1 Crore From ELSS Funds……………
An investor investing in ELSS mutual funds can create wealth equal to 1 crore, and this prominently depends on two factors-
- How long would he be investing in ELSS funds? Because the longer he will invest the less will be his investment, and the short his investment tenure will be the more he will be required to invest to create a corpus of Rs 1 crore.
- It would also depend on the expected returns from the ELSS funds over the said period of 10-15-20 years. Since these are equity-oriented products, let’s say they can deliver around 10-12% average annual return over the long term.
Now let us calculate, how much will be required to invest monthly to create a corpus equal to Rs 1 crore in the given number of years:
- If investment tenure is 10 years, then to accumulate Rs 1 crore, you need to invest Rs 43-48,000 per month in ELSS funds at 10-12%
- If investment tenure is 15 years, then to accumulate Rs 1 crore, you need to invest Rs 20-24,000 per month in ELSS funds at 10-12%
- If investment tenure is 20 years, then to accumulate Rs 1 crore, you need to invest Rs 11-13,000 per month in ELSS funds at 10-12%
Note – These are approximate figures. Also due to the 10% LTCG tax on equities, the actual amount that you need to invest in ELSS funds now will be slightly higher.
This is how an investor can create a corpus of Rs 1 crore from his ELSS fund!
ELSS Fund Tax Limitation…………
ELSS is mainly preferred by investors who plan to invest to save tax on their returns. And in respect of taxation benefit from the ELSS fund, an investor must ensure that he does not exceed the upper limit. That simply means he cannot invest more than 1.5 lakh per annum (not more than Rs 12,500 per month) in ELSS funds else he will lose the tax benefits.
But then comes another aspect. If you aren’t getting any additional tax benefits if you invest more than Rs 12,500 per month in ELSS funds, then why invest more in ELSS funds and have a lock-in of 3 years?
Instead, you can pick a combination of large-cap funds, index funds, Flexi-cap funds, mid-cap funds amongst many other mutual fund categories to invest the amount above Rs 12,500 per month of Rs 1.5 lakh a year. Investing this way also you can create wealth in crores!
Let Us Sum-Up!
The above-explained strategy tells about how one can create wealth equal to Rs 1 crore by investing in ELSS funds. However, before you plan your crores from ELSS funds, I suggest, get sure with the aim of your investment in ELSS funds, whether tax-saving or wealth creation.
Once you consider your goal, you can easily decide whether you should be investing in ELSS mutual funds to create a corpus of Rs 1 crore or not?
If you plan for wealth creation, I do suggest plan your investment in other fund schemes of equity category like large-cap funds, small-cap funds, Flexi-cap funds, or more!
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Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).