• 1. What is an ELSS?

  ELSS stands for equity-linked savings scheme which is a type of diversified equity mutual fund. The fund invests at least 65% in equity and equity-related instruments. These funds have a 3-year lock-in period and during this period the units cannot be redeemed or transferred to another scheme.
  
  These funds come with an inherent tax benefit which can be claimed under section 80C of the Income Tax Act, 1961. The maximum limit allowed under this section is Rs. 1.5 Lakh.
  
  

• 2. Why is there a 3-year lock-in period?

  Investments in ELSS funds are subject to a 3-year lock-in period as there is an applicable tax benefit. This is imposed by Central Board of Direct Taxes (CBDT).
  
  It is a part of the structure of the funds. Most other tax-saving investments also have such specific lock-in period. However, ELSS funds have the least lock in tenure among the all tax saving investments in the industry.

• 3. When can ELSS Funds be redeemed?

  There is no mandatory requirement of redeeming an ELSS investment after 3 years. It can be continued for ever as well. However, in case you wish to redeem, it can be done any time after the mandatory lock-in tenure of 3 years.
  
  Lumpsum Investments in ELSS can be redeemed right after the 3-year tenure is over. However, for SIP investment (systematic monthly investment), each SIP instalment is locked in for a tenure of 3 years.

  For example:

  1. Investment in ELSS in Jan 2018 would be locked in till Dec 2020 and can only be redeemed in Jan 2021.

  2. Similarly, investment in ELSS in Feb 2018, can only be redeemed in Feb 2021, and not before that.

  So, units allocated for each SIP investment would be eligible for redemption after completion of 3 years.

• 4. Should I wait for the markets to correct / fall to invest in ELSS schemes?

  Time spent in the market is more important than timing the market, as a novice investor, you may not be able to time the market appropriately. You can choose the systematic route to invest in ELSS schemes wherein you will invest a certain pre-determined amount at frequent intervals over the chosen tenure.
  
  However, since ELSS funds provide an income tax benefit under section 80C, it is best invested at the beginning of the financial year so that tax planning and other financial planning can be done well in advance, without the last-minute rush.

• 5. What is the risk index of ELSS schemes?

  Since the funds invest in equity markets, they are subject to market risk. The volatility of capital markets is higher as compared to any other instrument. Hence, ELSS is typically categorised under the very high risk index.

• 6. What are the minimum and maximum investments allowed in this scheme?

  The minimum investment allowed under this scheme is Rs. 500 per month. The investment can be made either every month (via the systematic investment mode) or through a lump sum. Also, there is no maximum limit applicable in ELSS investments.
  
  However, the tax benefit is restricted under section 80C to the extent of Rs. 1.5 Lakh per annum only.

• 7. Are the returns guaranteed in ELSS?

  No, these are market-linked instruments, there is no guarantee of returns. Their primary aim is capital appreciation, they have the potential for high returns and hence, they are very high risk instruments.

• 8. How to select the right ELSS funds?

  Some of the key factors one should consider before investing in ELSS are:

  1. a. Choose a reputed fund house

     Investigating and researching about the fund house you choose to invest in, is critical. The fund house should have had prior experience in handling significant investments.

  2. b. Check the fund manager’s experience and past track record:

     Investing in an ELSS fund is commitment of 3 years. Hence, researching sufficiently about every aspect is important. Fund manager who is the key decision maker with respect to the fund should be competent to deliver returns during all phases of the market. It is important to briefly research about his experience and expertise to have a sense of assurance that you have put your money in the right hands.

  3. c. Check for past performance:

     Although the past performance does not indicate that the fund could do well in the future, it is an indicator of how the fund has performed against a benchmark, it provides an idea about the funds' ability to mitigate risks. The competence of the fund manager and the fund’s ability to sustain during market downcycles is usually gauged from this perspective.

  4. d. Expense Ratio:

     It is the cost of managing the mutual fund and the related operating expenses. A higher expense ratio may bring down your return on investment to that extent. So, while investing in an ELSS fund, look for the one which has a lower expense ratio.

Finally, if you are a new investor, you can take help a financial advisor who could help you choose the right ELSS fund which aligns well with your risk–return profile!

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.