Seven Things to Know About Investing in ELSS!

Posted by Nirav Singhaniya on October 18th, 2019

Equity-linked savings scheme (ELSS) is a popular tax-saving financial instrument available for investors. It is a close-ended diversified mutual fund that invests a major chunk of its funds in the equities of companies from varied industries and of different market capitalisation.

So, if you’re wondering whether or how to invest in ELSS, here are some pointers to help you make that decision:

Consider the tax advantage

Obviously, the biggest advantage of investing in an ELSS fund is that you get a tax deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961. What is means is that your taxable income will be Rs 1.5 lakh lower!

Consider the equity advantage

Not only does ELSS offer you the benefit of tax savings, it also enables you to participate in the equity market and the higher returns it usually offers

Choose the right fund

While pondering about how to invest in ELSS funds, remember that all ELSS funds are alike when it comes to the tax benefit, but they’re not the same as far as performance is concerned. So, it’s important for you to choose the right fund. There are many web sites that rank ELSS funds according to performance. Visit a few and find a mutual fund that ranks high in all of them.

Remember, it’s a short lock-in period

ELSS funds are often compared with Public Provident Fund (PPF), National Savings Certificate (NSC) and fixed deposits (FD) of banks for the tax advantage. Here, ELSS scores over the others mainly because its lock-in period is the shortest – three years compared to 15 years for PPF, six years for NSC and five years for tax-saving FDs of banks.

Look beyond the lock-in

Some investors look at ELSS as just another tax saving instrument and redeem their investments immediately after the end of the lock-in period. But it may be more fruitful to stay invested for a longer period, especially if the fund has been performing well. Keep track the fund’s performance, and it’s doing well, don’t pull out that money.

Growth vs dividend

ELSS funds, like other mutual fund schemes, offer the dividend and growth options. In the growth option, any dividend paid by a company whose share the scheme has invested in gets reinvested and you get a lump sum at the end of the lock-in period. If you choose a dividend option, dividends are paid to you whenever they’re received during the tenure of the ELSS scheme. Pundits recommend the growth option, since you get much better returns at the end of the lock-in period.

Consider the risk

Investing in ELSS funds entails some risk mainly because the returns are dependent on the share market’s performance. But hey, as a wise man once said: “No pain, no gain”!