Things should be taken care of while Investing in Tax Saving Funds(ELSS)
introduction : elss funds
While tax planning may seem to be a difficult process, Mutual Funds offer us a simple way to get tax benefits, while aiming to make the most of the potential of the equity markets. An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn’t just help us save tax, but also gives us an opportunity to grow our money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act. It is true and the attraction point for most investors. Still we should not limit our vision but use this investment instrument to its full potential.
Being equity linked investment, it is the riskiest investment option amongst all the other 80C investments. Therefore, while investing in ELSS, investor should take care.
1. Do not invest late during the year and avoid lumpsum investment.
- We usualy consider Investment in ELSS only as a tax saving option. Therefore, the investment is done with a view to complete the investment of Rs. 1,50,000. As the investment is made late in the financial year, most of the times investors tend to invest in lumpsum.
- We do not recommond this strategy especially for salaried class. When you invest in lumpsum, you are basically timing the stock market and putting a large sum at that time. This strategy can be helpful if markets are undervalued and can be bad if markets are overvalued, so therefore higher risk. Whereas if you take SIP route, you get help of stock market averaging. Thus you can invest your money in whole cycle.
2. Do not invest in too many elss funds
Many investors invest in a new Tax Saving Fund every year. This causes excessive diversification of funds. similarly, it becomes difficult to handle and monitor the portfolio. Investor should shortlist the best ELSS funds, select one of those funds and should invest only in one ELSS fund.
3. Do not redeem the money after 3 years
- As a tax saving tool, ELSS offer the shortest lock-in-period of 3 years. As stated earlier, many investors tend to invest in ELSS just to complete the tax deduction limit of Rs. 1,50,000 under section 80C and therefore, sell the funds immediately after completion of 3 years.
- However, this strategy is not at all recommended. Investment in ELSS should be linked with the long-term goal and it should be treated as any other Equity Mutual Fund, where recommended investment duration is minimum 5 to 15 years. So we should keep the same investment duration for ELSS.
4. Do not choose dividend option
- When a dividend option is chosen, either dividend is paid on a regular basis, or it gets reinvested. Any dividend option ultimately reduces the NAV and therefore the returns.
- On the other hand, if dividend reinvestment option is chosen, then the lock-in-period of 3 years is counted from the date of reinvestment, therefore, every time dividend is reinvested, that dividend amount is locked for a period of 3 years from the date of such reinvestment. Therefore, in any case, we don’t recommond dividend re-investment option as far as ELSS are concerned.
- Therefore, to achieve the maximum compounding benefit and maximum rate of return, investor should always invest under a Growth Option.
5. Consider the long term returns rather than short term returns
- As explained earlier, while selecting ELSS, investor should focus more on long term returns and consistency of the same. Ideally, we recommond fund with a strong track record of at least 6-8 years. If an ELSS fund has a track record older than 8 years, then such fund should be definitely shortlisted for investment purpose.
- To know more about the analysis of ELSS funds. Please visit our YouTube video.