4 Things to Remember Before Investing in ELSS Funds

It’s a challenge paying taxes on hard-earned money. Taxes are difficult to avoid, but you have ways to save tax. You can use Section 80C of the Income Tax Act to reduce your taxable income. The investments you make and some expenses get this tax break. Equity-Linked Saving Scheme or ELSS is a tax saving investment under Section 80C. 

Go through these four points before investing in the tax-efficient investment. 

1. A great way to start investing in equities

Want to invest in equities and don’t know where to start?  ELSS an equity-diversified mutual fund invests primarily in stocks. It is an ideal way of investing in the stock market. You enjoy the benefits of diversification and professional management. 

Consider an investment in ELSS through a systematic investment plan or SIP. You can invest even Rs 500 a month, without timing the market. The slow and steady approach of investing through SIP imparts financial discipline. 

ELSS has a lock-in period of three years. It helps you get used to the volatility in stock markets. 

2. ELSS is moderately high-risk in nature

ELSS invests in stocks and is a risky investment. You can reduce the risk by staying invested for a longer investment horizon. It enhances your chances of creating wealth. 

You may continue with the ELSS investment beyond the lock-in period if it performs well. It is a way of beating the volatility in stock markets. Invest with a horizon of around five to seven years.

Never use past performance as a yardstick when picking ELSS funds. The fund may necessarily not perform well in the future. 

Also Read: Why Do You Need an Emergency Fund?

3. Shortest mandatory lock-in period

ELSS has the shortest lock-in period among tax-saving investments under Section 80C of the Income Tax Act. You can invest and claim a tax deduction up to Rs 1.5 lakh a year. 

The Public Provident Fund or PPF has a lock-in period of 15 years. The other investment avenues have a minimum lock-in period of five years. The ELSS fund offers the shortest lock-in period, coupled with the possibility of higher returns. 

However, you must decide on the investment amount, if you have invested in other tax-saving instruments under Section 80C. Invest in ELSS only if it matches your risk profile. 

4. Avoid multiple investments

It’s tempting for you to invest in a new fund each year.  Multiple investments are tough to track. 

Mutual Fund advisors recommend investing in a maximum of two ELSS funds. The mutual fund is a diversified product. 

You may get lower portfolio returns by investing in multiple funds. Review the performance of your ELSS funds. Switch to a new fund only if your current investment performs poorly. 

Consider an investment in equity, if you are young with a steady income. Always have a realistic expectation from your investment. Invest in equity for the long-term for a higher return. ELSS funds offer tax benefits and a way to attain your financial goals. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in