An Equity Linked Savings Scheme (ELSS) is a diversified equity mutual fund that gives you a dual benefit of tax saving with the growth potential of equities. However, unlike other tax saving investments, ELSS has a lock-in period of just 3 years. ELSS aims to beat rising inflation in the long run by investing primarily in equities.
You can invest in ELSS through Systematic Investment Plan (SIP) and also lumpsum. Investing through an SIP also gives you the benefit of rupee-cost averaging and compounding, that helps you ride over market volatility over the long term. An SIP is a process through which a fixed amount is invested every month. When markets are down, you end up buying more units at the same price, and when the markets are up, you buy fewer units. Over time, this results in averaging out the cost per unit, than if you buy all the units at one go.
Overall, ELSS is a good investment vehicle to save tax as well as to build wealth over the long term. If you really want to reap the rewards of your tax saving investments, think beyond the lock-in period of three years.
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