April 19, 2024

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Consider these factors before investing in an ELSS scheme

5 Factors To Consider Before Investing in ELSS Mutual Funds | FinEdge

One of the popular investment avenues nowadays is an equity-linked savings scheme or ELSS. An ELSS mutual fund provides tax-saving benefits and comes with the potential to earn higher returns. Because of its tax-saving features, ELSS is referred to as a tax-saving mutual fund.

What is ELSS?

Like all numerous other mutual fund variants, ELSS is a pooled investment option investing in money market instruments. They allocate approximately 65%-80% of the corpus in equities and their related instruments. The remaining investible corpus is invested in other securities like debt and gold. ELSS is a fund with tax benefits applicable under Section 80C of the Income Tax Act, 1961. Under Section 80C, you can enjoy a tax rebate of up to ₹1,50,000 annually. Here are some of the key features of an ELSS mutual fund:

  • These funds are equity-oriented and therefore, they are a high-risk investment. Approximately 65-80% of the corpus is spread across different capitalisations and sectors to have a balanced and diverse investment portfolio.
  • This variant qualifies for tax exemption under Section 80C. It means you can claim a tax rebate of up to ₹1,50,000 in a year. Nearly ₹46,800 is saved if you consider investing in ELSS.
  • You can invest in ELSS periodically through a lump sum or a SIP (systematic investment plan) mode. The required investment amount for both, lump sum and SIP may vary according to different AMCs (asset management companies). However, there is no upper limit on the maximum amount that you can invest.
  • These funds also come with a lock-in tenure of 3 years. This means that a premature exit is not applicable. It is also important to note that among all tax-saving investment options that usually have a minimum lock-in time of 5 years, ELSS have the shortest duration. Simultaneously, there is no maximum tenure and hence, you can invest as long as you want.

Factors to consider before investing in ELSS:

Here are a few factors you must consider before investing through an ELSS mutual fund:

  1. Investment mode:

There are two investment modes that you can opt for an ELSS mutual fund investment. One mode is the lump sum and the other is a systematic investment plan or SIP. Under the lump sum mode, you are required to invest the entire amount at once. SIPs, conversely, offer the flexibility of investing regularly. While investing in ELSS, you start by investing through SIPs at the start of the financial year. This might help you save on taxes. Regardless of the investment mode, you must have an idea of the required investment amount. You can get a clear idea of that by using a mutual fund calculator.

  1. Lock-in period:

The lock-in period is one of the most important factors you must consider. Mutual funds usually are liquid and don’t come with a lock-in period. However, ELSS unlike other mutual fund types come with a lock-in period of three years. This means that you need to stay invested for three years.

  1. Growth and dividend options:

You have two options, namely, growth or dividend options. In the dividend option, you can receive regular income in the form of dividend payouts as long as you stay invested in ELSS. In the growth option, there is no dividend benefit. Instead, they are reinvested to let the capital grow.

Conclusion:

An ELSS fund is an equity mutual fund variant offering twin benefits of tax-saving and wealth accumulation. Invest in ELSS if you want to reduce your tax liability.

Visit ELSS page to know more.

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