5 Things You Need to Know Before Investing in ELSS Funds

Mar 10, 2021

Diversification is the key to any investor’s financial portfolio. Investing your money in reliable investment tools not only offers diversification, but it also reduces the overall risk of your investment portfolio. The financial market is flooded with a wide range of investment schemes. Depending on your financial goal, you can opt for an investment scheme that aligns with your risk appetite and investment horizon. There are few investors who prefer the traditional way of investment while there are others who do not mind going the extra mile and investing in tools that have high risk returns potential.

The same applies when it comes to saving tax. So if you are someone with a moderately high risk appetite seeking capital appreciation through long term equity investments, you can consider investing in ELSS. If your ultimate goal is to save tax and build wealth in the long run regularly, then might want to take a look at ELSS as an option. This tax saving scheme is suited for investors who do mind exposing their finances to the vagaries of the market.

If you wish to find out more about ELSS, read further:

What is an ELSS Fund? How does it work?

As per SEBI’s categorization , “Equity Linked Saving Scheme (ELSS) is an open ended equity scheme which comes with a statutory lock- in of 3 years and offers investors some tax benefits. Of the total assets, a minimum of 80 per cent is invested in equity and equity related instruments.”

Equity Linked Saving Scheme or ELSS is a mutual fund investment scheme that allows investors with an opportunity of investment capital appreciation in equity along with tax-saving benefits. What ELSS fund managers do is that they primarily invest in the equity market. Hence returns gained from ELSS are subject to market volatility. Investors cannot redeem or withdraw his / her ELSS units for at least three years or till the maturity of the scheme.

You can invest in an ELSS scheme either through lump sum payment or through SIP. To understand these two terms, continue reading:

Lump sum: When investors have a substantial amount parked in their savings account which they wish to invest in order to fetch some better returns, may choose to pay the entire premium amount at the beginning of the investment cycle. This method of payment is known as a lump sum investment.

SIP: Systematic Investment Plan or SIP is a systematic approach towards investment which can prove as an essential tool for investors. With SIP, all an investor needs to do is instruct their bank, and a certain amount will be deducted every month from their bank account and directed towards their investment. SIP is a straightforward and hassle-free process.

Here are five things you need to keep in mind before investing in ELSS:

  • ELSS carries a moderately high risk

ELSS, being an equity oriented scheme, has a minimum of 80 per cent exposure to equity and equity related instruments. This also means that it contains a moderately high risk bearing scheme that has your investment money exposed to the vagaries of the market. And money invested in the equity market is subject to volatility, which also means that returns are never guaranteed. However, if you stay invested for the long run, your investments stand a chance to be averse with the daily market fluctuation.

  • ELSS has a lock-in period

ELSS unit holders cannot withdraw or redeem their funds for three years at least, that’s because ELSS comes with a minimum lock-in period of three years. But bear in mind that this probably the shortest lock-in among tax saving instruments. Post completion of the minimum lock-in period, you can hold your ELSS investment as long as the fund is performing well. Later, you can choose to continue with the fund or withdraw or sell your units after completing the lock-in period.

  • ELSS has tax benefits

ELSS can help you save tax and, at the same time, allow you to gain some from equity investment. Having a tax saving instrument that serves dual purpose may prove to be essential for an individual’s investment portfolio. ELSS, under Section 80C, is eligible as a tax saving instrument. An investor may invest up to Rs. 1, 50,000* annually and claim tax deductions from their gross annual income. Though investors can only claim tax deductions worth Rs. 1.5 lakhs, there is no upper limit for ELSS, and investors may invest as much as they want in an ELSS fund.

  • ELSS investors should hold on to their units for a long run

Though ELSS comes with a minimum lock-in period of 3 years, in case the fund is performing better, instead of withdrawing you may choose to stay invested for a more extended period instead of withdrawing. Historically, mutual funds have performed better when held for longer. Investors should bear in mind that mutual fund investments are subject to market volatility, and historical returns may or may not justify the fund’s current for future performance.

  • Anytime is a good time for ELSS investment

Anytime might be an ideal time to invest in ELSS for anyone who is wanting to save taxes and increase their hopes of earning some extra income. During tax season, investors flock at various tax saving schemes but aren’t able to choose the right one. ELSS may be considered as an investment option during the tax season because it not only does allows investors to save tax up to Rs. 1.5 lakhs, but also gives them a chance to earn some extra income.

Axis Long Term Equity Fund is not solely a tax saving scheme. It can be a sensible investment scheme as well if stayed invested for a more extended period. You can even buy Axis Long Term Equity Fund online these days.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This is a partnered post.