Mutual funds are not a monolith.Choosing the right mutual fund variant is equally imperative. Equity-linked saving schemes or ELSS is one of these variants.ELSS offers dual benefits of saving on taxes and stock market investments. ELSS mutual funds over the years have become popular because of their tax benefits. Investing in ELSS these days are convenient because you can invest in this mutual fund online too.
Things to remember before investing in ELSS?
Just like mutual funds in general, you should be aware of certain aspects of an equity-linked savings scheme before investing in it. Listed below are a few of these things:
- Asset Composition
In an ELSS fund,the fund manager invests approximately 80% of assets in either equity or equity-related instruments. After that, the manager investsthe rest in fixed-income or money market instruments. Furthermore, fund managers choose the kind of stocks they invest in after ascertaining the fund’s objective and risk level. Hence, an ELSS fund with a high-risk level invests more in small- or mid-cap stocks.Conversely, a Medium-risk ELSS fund invests more in large-capstocks.
- Investment objective
One of the reasons behind the popularity of ELSS is its tax benefits. However, these funds are more than just a tax-saving mutual fund. In case you are investing in these schemes only to save on taxes, first carry out thorough research. Equity-linked savings scheme returns are market-linked and thus are volatile. So, before making tax-saving investments in ELSS look up factors like the risks, lock-in period involved, and returns.
- Investment modes
Between lump sum and SIP a convenient mode of investing in ELSS is the systematic investment plan or SIP mode. ELSS investments throughSIPs can help in averaging your investment costs and thereby optimise your profits.
- Lock-in Period
Several investment optionsthat offer tax benefits under the provisions of Section 80C of the Income Tax Act, 1961 come with a mandatory lock-in period. The lock-in period for ELSS spans three years.Therefore, you can redeem the units of an ELSS fund only after the completion of three years. Three years is considered the lowest lock-in period in comparison to other Section 80C investments. For example, PPF has a lock-in of 15 years and the lock-in period of NSC is5 years.
- Risk appetite
ELSS funds mainly invest in equity and equity-related instruments. However, not all ELSS funds are necessarily high-risk schemes. Differentvariants of ELSS funds havevarying risk levels that cater to different investors. While investing, determine your risk appetite and ensure that yourinvestment choice syncs with your financial goals and investment plans.
- ELSS redemption
As stated above, ELSS funds come with a lock-in period of three years.Hence, generally, investors redeem their investmentsright afterthe lock-in period. However, it is important to look if the fund is performing well, even after three years. If that’s the case, refrain from redeeming your investments. Stay invested in ELSS for at least 5-7 years These funds may give higher returns if you stay invested for a longer duration.
Conclusion
Apart from the six above, there are several other tips that you need to remember when you are investing in an ELSS fund. Thesemutual funds might suit youin case you are looking for an investment optionthat helps you in saving taxes and exposes you to the stock market. Also, remember that different types of ELSS funds are available. Thoroughly research those variants and choose a fund that aligns with your financial plan while simultaneously reducing your tax liability.
