Are you New to Investments? What do you know about ELSS?

ELSS (Equity Linked Savings Scheme) is a particular type of mutual fund scheme that mostly invests in equity and equity-related instruments to generate high returns. What makes ELSS stand apart is that investment up to 1.5 lakh in ELSS is eligible for deduction from taxable income in a financial year, unlike other equity mutual fund schemes. The scheme offers a statutory lock-in period of 3 years for each SIP. If you are new to investments, it can be a really lucrative option for you to consider, as finances should ideally be planned in a way that is inclusive of tax-saving options. This will help in maximising your returns. No wonder steady investors also often prefer this mode of investment. Let’s look at some of the key features of ELSS that you must be familiar with, before you look for the best ELSS funds to invest in:

Shortest lock-in period: ELSS has the shortest lock-in period of 3 years, as compared to other tax-saving options such as PPF (15 years), tax-saving FD (5 years), etc. This lucrative feature makes it hugely popular amongst investors. However, it should also be noted that exiting the fund as soon as the lock-in period expires means the fund will not realise its full growth potential. It is advisable to have long-term goals when investing in ELSS.

Equity exposure: new investors find ELSS to be a stepping stone to investing in equities. These offer the benefit of professional fund management, while also providing a well-diversified portfolio at a low investment amount when you invest via the SIP mode. When it comes to opting for the SIP mode, know that a fixed sum of money will be invested towards your preferred ELSS fund every month.

Risks involved: irrespective of the amount of money you invest, it is important to remember that since ELSS funds invest in only equity stock of companies, it is prone to a relatively higher risk of fluctuation in their NAV (Net Asset Value) as compared to the other tax-saving alternatives. However, you can deal with this risk by staying invested for longer, investing via SIPs and maintaining a well-diversified portfolio.

Tax exemption limit: you can claim a limited amount of tax deduction for investing in ELSS funds. No matter how much you invest, your tax deduction will be limited to 1.5 lakhs in a year. Keep in mind that this deduction is inclusive of other tax saving investment options covered under Section 80C of the Income Tax Act. You should note this while calculating your post-tax profits.

Returns are not guaranteed: while ELSS lump sum does have a reputation for generating higher returns as compared to conventional investment avenues, market risks are also to be factored in. how the fund has performed so far is indicative of its progress so far but you cannot be sure of getting the same returns. The fund will go through various market cycles, and you can improve your chances for a higher return by staying invested for longer.

Benefits of investing money for beginners in ELSS:

High returns: being essentially an equity scheme ELSS has the potential to deliver phenomenal returns in the long run. Besides, it has the lowest lock-in period amongst other tax saving instruments. Although Risky, you can gain significantly from ELSS.

Tax exemption: ELSS allows you to save taxes, as you can invest up to 1.5 lakh which is eligible for tax exemption.

Diversification: the investment portfolio of ELSS encompasses balanced allocation to a wide range of asset classes such as equity and debt securities. Further, funds frequently practice diversifying their investment portfolio across small cap, mid cap and large cap companies. Thus, you can easily diversify your overall investment portfolio and effectively reduce market risk.

Professionally managed investment: your investment portfolio under ELSS will be managed by professionals who are perfectly aware of the dynamics of the financial market. You can rest assured your money is in safe hands.

Disciplined investment: since ELSS entails a minimum lock-in of 3 years, it inculcates investment discipline amongst consumers.

Should you invest in ELSS?

A. If you want to reduce your tax liability along with high capital growth. Investors on the lookout for equity investment avenues that promise significant long-term returns should opt for this.

B. This scheme perfectly caters to the needs of investors with a long-term investment horizon (preferably more than 3 years), since the lock-in period is a minimum of 3 years. Besides, insiders believe that equity securities perform well in the long run, and thanks to the mandatory lock-in period, investors remain invested.

C. Since the underlying assets mostly comprise the highly-volatile equity securities, the investor should have a high-risk appetite and a long-term goal of wealth creation.

D. If you have already invested 1.5 lakh in different tax saving avenues under Section 80C, you can opt for other equity funds that are not accompanied by any lock-in period. Alternatively, you can consider other tax saving instruments such as health insurance for self/spouse/parents, National Pension Scheme, etc.

How to invest:

1. Online: several online platforms allow you to invest in ELSS in a seamless manner. You can also apply directly through the websites of the Asset Management Companies (AMCs), offering the fund.

2. Offline: this is a more conventional mode, wherein you just need to fill a form and submit it at the nearby branch of the fund house. You can also consider investing through a broker.

Things to avoid:

Don’t begin late: this holds good for all tax-saving instruments. If you start investing early, you will have ample time to research about where and how to invest in ELSS.

Don’t judge schemes based on short-term performance: it’s not a good idea to invest your money based on six-month or one-year returns given by a particular scheme. Make sure the scheme you choose has been proven to be a consistent performer for at least five years.

Look beyond returns: yes, returns are the primary criterion but when investing in ELSS, you should also try to determine whether its investment philosophy matches your vision.

Don’t be a victim to the dividend trap: the dividend is actually paid to you from your own money. It’s better to avoid the dividend option unless you really need periodic income. On the other hand, if you are more intent on creating wealth, make sure you stick to the growth option.

Don’t accumulate too many ELSSs: some investors make the mistake of investing in a new ELSS every year. This can hinder the efficient management of your portfolio over a long period of time. If you have too many ELSSs in your portfolio it will lead to over-diversification and you will find it difficult to monitor the portfolio.

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