10 Things You Need to Know Before Investing in ELSS

Equity Linked Savings Schemes (ELSS) are one of the most favourable investment instruments due to the short lock-in period of three years, the tax benefits and the higher returns compared to other asset classes. ELSS is suitable if you have a moderate risk appetite. However, there are ten things you need to know before investing in some of the best ELSS funds.

ELSS is a good beginning if you are young and are keen on exploring the equities market without having to keep a vigilant watch. ELSS provides a great introduction to the equity mutual funds and helps you get accustomed to the market vagaries during the three-year lock-in period.

The three-year lock-in period teaches you financial discipline. But to get the maximum benefit of equity funds, it’s advisable to be patient and keep the fund going for a longer period.

It’s a no brainer that equity comes with risks. But by maintaining the investment for a longer period, you can overcome the market risks and achieve higher returns.

Keep in mind that the maximum tax exemption is Rs. 1.5 lakhs per annum. So, if your Public Provident Fund (PPF) investment is Rs. 1 lakh, then you can claim only Rs. 50,000 of your ELSS fund for tax exemption. Calculate your overall investments before selecting the best ELSS funds.

You can invest in ELSS depending on your financial goal and your risk appetite. There’s no limit on the investment amount but anything exceeding Rs. 1.5 lakhs cannot be claimed for tax benefits.

ELSS helps achieve your long-term goals such as a child’s education or your retirement by generating a larger corpus over an extended period. Besides your tax-saving goal, you should consider ELSS for your long-term goals.

Avoid last-minute hasty investments, and start investing for saving tax and other financial goals at the beginning of the financial year. Choose the Systematic Investment Plan (SIP) for regular investments in equities and greater compounding benefits over an extended period. The advantage of rupee cost averaging allows you to purchase more stocks when the market is down and sell the same in case of market rise.

To save tax, you may purchase the new and best ELSS funds from different asset management companies every financial year. While ELSS helps accumulate wealth, having too many ELSS funds only leads to over-diversification of your portfolio. Besides, it can get challenging to monitor multiple ELSS funds.

You will incur 10% tax on Long Term Capital Gains (LTCG) exceeding Rs. 1 lakh per annum. Earlier, investors would receive dividend income after deduction of 11.64% Dividend Distribution Tax (DDT) on distributing companies. But as per Budget 2020, the dividends will be taxed at investor end depending on the investor’s tax bracket.

ELSS has the potential for higher returns compared to traditional investment products. However, ELSS is subject to market risks and considering the market is cyclical, the rise and fall of equities are temporary. Even though you purchase the best ELSS funds as per their past performance, these may not guarantee higher returns in future. As mentioned above, it’s best to stay invested beyond the lock-in period for better returns.To conclude, ELSS is an excellent investment for tax saving and wealth creation. Consider the points mentioned above to make the optimum use of your investment.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.