In the last few years, the number of people investing in ELSS funds has witnessed an upward curve. Because of the popularity of ELSS funds, it is better if you are aware of the pros and cons of such type of funds.
The positives of ELSS funds
Any amount invested in ELSS funds is entitled to rebate of 1, 50,000 as per section 80C of the Income tax act in the present year. This works out to be the only scheme where investors can save on the tax front and earn higher rates of return from equity based funds.
Among the various tax savings investments offers the lowest lock in period
As compared to other tax saving instruments having a 5 year lock period, with ELSS it is only a 3 year period. This stands to be lower when it is a 5 year in case of fixed deposit and for PFF it is 15 year wait. When compared it provides high returns on a waiting period of 3 years.
Power of compounding
A general suggestion would be to invest in ELSS funds with a long term horizon in mind spanning around 5 to 10 years. By default due to a pre -set lock in period ELSS provides an opportunity for saving. In doing so investors are able to cash in on the power of compounding in the long run.
After 3 years redemption is not compulsory
If an investor is happy with returns anticipated from an ELSS fund, they can opt to continue. After 3 years redemption is not compulsory in any way. Though there is minimum investment duration, but no form of maximum investment duration exists.
When you are investing in ELSS funds you have an option of SIP. This paves way for an investor to invest a fixed sum of money at periodic intervals of time. It also means that the salaried class of individuals can set aside a sum of money every month in such funds.
Transparent and safe
To invest in mutual funds is a safe and transparent option. All the mutual fund companies fall under the banner of SEBI and necessary disclosures have to be made.
As ELSS funds are equity related schemes higher rates of returns are anticipated. Generally the returns are as high as 20 % when you compare it to other tax saving instruments offering returns to the margin of 7 %. Over the course of 3 years, the returns of equity along with compounding offers attractive investment value for an investor.
But all is not a rosy situation as far as investment in mutual funds evolves. There are some pitfalls as well. First and foremost tax benefits are allowed to the tune of Rs 1,50, 000 for any given year. This is irrespective of the amount you end up investing in a mutual fund. Any investment made in ELSS funds depends upon financial objective of an investor and how aggressive or conservative they are as an investor.
How invest in ELSS
ELSS as the name suggests is equity based mutual fund. In case of mutual fund the company pools funds from various investors and an attempt is made to reward them with profit. This profit is divided among the investors as a regular pay out or a lump sum amount at the end of the tenure. With ELSS tax benefits you are entitled to the same features, but an exemption to the tune of 1, 50,000 can be availed. These are instruments that can provide you with the highest returns but do carry a certain degree of risk. Once again it is going to depend upon the asset class you are going to deal.
How an ELSS is going to work
As the name suggests ELSS is a diversified fund, where a majority of shares are invested in equity based funds of a company. The fund manager is going to prepare a diversified portfolio by investing in various types of assets spread across varied industries. The NAV would fluctuate on the basis of the underlying stocks and the varied benchmarks.
The logic of ELSS is that funds are bound to get effected by overall fluctuations of the equity market. But you need to keep the returns in line with your expectations and in the industry segment it is not affected by price movements. In case if the funds try to generate more returns it can pave way for capital appreciation in the long run.
The right time to invest in ELSS?
Investment in ELSS can be done at any time of the year. But just before the tax returns season there is a spike in the purchase of such instruments. A general mind- set among Indian masses is to reduce tax liability as far as possible. At this juncture tax saving instruments becomes a lot popular and investing at the end of the financial year would help you to save on taxes. But there is no chance to benefit from capital growth or to receive dividends during this time of the year. A comprehensive step by step guide to invest in mutual funds is as follows
Step 1- Research
As part of your first step the key is to locate an ELSS fund that suits your requirements. There are thousands of ELSS funds in the market. So the key would be to locate an ELSS funds that satisfies you financial objective. In this regard you can avail the services of professional companies.
Step 2 – figuring out the amount
The second aspect is how much amount you are planning to invest in ELSS funds. You need to be aware of the fact that they are tax saving instruments. As per section 80 C an amount of 1, 50,000 can be saved in the form of taxes, but anything above this amount you are not entitled to any claims. So if an investor has already claimed the maximum deduction less than 80 C there is no point in opting for ELSS funds.
Step 3- Investing
In case of a standard process of investing it means numerous trips to a fund house or even through the bank by which you make the investment. Always opt for a professional company where paper work is a bare minimum. They are going to ensure a fast track process of claims where things are secure in an online environment
Step 4 – Lump Sum or SIP
Once you have selected the scheme the question arises are you planning to invest in lump sum or via systematic investment plan? If you choose the latter option you can avail the benefits of cost saving per average. This would ensure making full use of the market fluctuations to an investor.
Last step is redemption as there is a period of 3 years to make use of tax benefits.