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Planning To Invest in ELSS funds? Things You Should Know Before Investing

Equity Linked Savings Scheme or ELSS is a category of mutual fund that allows investors to save tax. Due to various campaigns by fund houses and the mutual fund industry, the popularity of ELSS has soared. However, it is seen that most investors invest in these funds without proper guidance and half-baked knowledge.

In this article, we bring to you a few pointers that you need to understand before investing in an ELSS fund. 

The returns of ELSS funds are market-linked

Most traditional tax saving investment options such as tax-saving fixed deposits, Public Provident Fund (PPF) give a fixed rate of interest that is revised from time-to-time. However, as equity-linked saving schemes (ELSS) are equity-oriented funds, the returns given by these schemes are market-linked. As a result, the returns delivered by the fund can be volatile in the short run. However, the returns tend to average out in the long term.

The lock-in period of ELSS funds is not a maturity period

In the Indian context, we relate investment options with a maturity period. It is no wonder as most of the saving options including tax options have a maturity period. Except for close-ended ELSS funds that mature within a specific period, open-ended ELSS funds do not have a maturity period.

These tax-saving funds have a three-year lock-in period. Typically, investors confuse the lock-in period with maturity period. Unitholders cannot redeem their investments within three years; however, it is not mandatory to withdraw the invested amount after three years.

As ELSS fund do not have maturity period, it can help investors to plan for their long-term financial goals. 

You can invest a certain sum of money every month in ELSS Mutual Funds

There are two ways to invest in an ELSS fund: one-time lumpsum investment or a Systematic Investment Plan (SIP). As fund houses offer SIP facility to ELSS investors, investors don’t have to wait till the last minute to invest in ELSS funds. One can easily invest the required investment amount regularly throughout the financial year by opting for systematic investment plans.

You don’t have to invest in a new ELSS scheme every year

As open-ended ELSS funds don’t have a maturity period, investors can invest the required investment amount in the ongoing ELSS fund. There is no need to invest in a new ELSS fund every year. Investing in several ELSS schemes can make it difficult to manage your portfolio. Also, it may lead to duplication of stocks in your portfolio.  

You can invest in a few ELSS funds if you are confident in managing the funds and the portfolios of the funds are unique.   

You can invest more than Rs.1.5 lakhs per year

Equity-linked savings scheme (ELSS) is a tax saving instrument under Section 80C of the Income Tax Act(1961). Taxpayers can invest a maximum of Rs.1.5 lakh overall in these instruments for tax saving purposes.  Likewise, you can invest up to Rs.1.5 lakh in ELSS fund to save tax. However, you don’t have to limit your investment in ELSS to Rs.1.5 lakh. Further investments will continue to earn the returns given by the fund which will help to grow your wealth and achieve your financial goals faster.

Conclusion:

Equity Linked Saving Scheme (ELSS) is one of the tax-saving options available under Section 80C of the Income Tax Act.  It can help investors to save tax and create wealth in the long term. However, as ELSS is different than other tax saving options, investors need to keep a few things in mind before taking exposure in ELSS.   


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