ELSS, also known as Equity-linked Savings Scheme is an attractive investment option for a number of reasons. ELSS funds have gained traction in the last decade or so, and for all the right reasons. However, before you decide to invest in ELSS, here are 5 things you must about ELSS tax saving mutual funds:
- How much should I invest in ELSS funds?
Let us assume that Ramesh would be saving Rs 3 lacs this year. He wants to invest them in mutual funds for higher returns. He has made a contribution of Rs 30,000 in other Section 80C instruments such as Employee Provident Fund (EPF) and Public Provident Fund (PPF). Then, the right investment amount to invest in ELSS funds will be Rs 1.2 lacs for that financial year. The rest of Rs 1.8 lacs should be allotted towards equity mutual funds that do not have any lock-in period. Remember, The upper limit of tax exemption under Section 80C is Rs 1.5 lacs.
- When to invest in ELSS?
ELSS fund, like any other type of mutual fund, is expected to move up and down throughout a year. Putting a lumpsum in one go might lead to dreadful returns if you enter the market when it is expensive. A monthly SIP is recommended by mutual fund experts to get the benefits of rupee cost averaging. SIP (systematic investment plan) helps to invest in mutual funds in a disciplined way.
- When will I get back the amount invested in ELSS?
Redemption in ELSS mutual funds happens on “first in first out” basis. If you have deposited a monthly instalment on 1st June 2018, then you can redeem it on 1st June 2021. Similar redemption cycle will be followed for other months’ SIP instalment.
- Should I invest in the ELSS fund that my friend has invested in?
No, you should not invest in an ELSS mutual fund just because your friend or relative has already invested in it or is urging you to invest in it. An investor might find themselves in this situation as they might not have the required time and resources to file their own taxes. It is suggested to either do your own research or rely on the services of a wealth advisor or an expert for the same. Remember, ELSS is an investment for at least three years (although the ideal horizon for any equity investment is five years); you do not want to have below-average returns on your ELSS investments.
- Investors should hold on to their ELSS mutual fund units for a long run
Although ELSS mutual funds come with a minimum lock-in period of just three years, investors are advised to stay invested for a longer duration, say 5 to 7 years. Historically, mutual funds tend to perform better when held for a longer duration. Experts often advise their clients to link their ELSS investments with their long-term goals so that they do not get tempted to quit the markets too early.