5 Things to keep in mind before investing in ELSS
Those who do not know, they can save tax by investing in mutual funds. Not all mutual funds come with a tax benefit but ELSS does Investors can invest in Equity Linked Savings Scheme or ELSS as it is commonly referred to as and save tax every fiscal year.
Here are 5 things to keep in mind before investing in ELSS –
1. ELSS has the shortest lock in period
Equity Linked Savings Scheme is a tax saver fund that comes with a short lock in period as compared to all the other tax saving instruments under Section 80C of the Indian Income Tax Act, 1961. ELSS comes with a predetermined lock in period of three years. This means that once you invest in ELSS, you cannot redeem that investment for a minimum period of 36 months from the date of investment. However, this 3 year lock in is the shortest as other tax saving instruments like bank FDs, Public Provident Fund, etc. have a lock in period that may span anywhere between 5 to 15 years.
2. ELSS has no upper limit
Although one cannot claim tax deductions for an investment exceeding Rs 1.5 Lacs in ELSS, that doesn’t mean you cannot invest a sum larger than that. You may not be aware, but many investors consider ELSS for their life’s long term financial goals. There is no upper limit in ELSS that means you can invest as much as you want, as much as your ultimate financial goal demands and as much as your risk appetite permits you.
3. ELSS has the SIP investment option
Investors can either make a lump-sum investment in ELSS or start a SIP. A Systematic Investment Plan is a simple and effective way to save and invest in mutual funds. Investors can build a commendable corpus with SIP investments. These days, one can start investing in ELSS with a monthly SIP of Rs 500 every month. The best part about SIP investments is that investors can favor the power of compounding and rupee cost averaging. Power of compounding is when your interests are earned and get reinvested back in the ELSS fund. Instead of redeeming these gains if you continue to reinvest, over the years this will create a compounding effect and turn your small monthly SIP sums into a decent corpus. Next, is rupee cost averaging. If you continue to invest in ELSS via SIP for a longer duration, you might be able to buy more units and reduce your total investment cost. That’s because the NAV (Net Asset Value) of the ELSS fund fluctuates from time to time. When the NAV is low more units are allotted. Similarly, when the NAV is high fewer units are allotted. This is referred to as rupee cost averaging where you average out the total cost of purchase, thus mitigating your overall investment risk and maximizing returns.
4. ELSS does not guarantee returns
Investors must not remain in blind sight and must be aware of all the pros and cons of ELSS investing. Do remember that this is an equity oriented scheme that predominantly invests in equity and equity related instruments. Although an ELSS portfolio is spread across company stocks belonging to various market capitalizations it does not guarantee returns.
5. High risk appetite
The ELSS portfolio is majorly exposed to market vagaries. This is what makes it a very high investment scheme. Investors must only invest in ELSS if they have a long term investment horizon and carry a very high risk appetite.