ELSS is also called a tax-saving mutual fund. It is one of the investment vehicles to begin your long-term wealth accumulation journey with an aim to save on income tax. So, what is ELSS or how to invest in ELSS? Let’s find out.
What is Equity Linked Savings Scheme (ELSS)?
It is a type of equity mutual fund where investments up to Rs 1,50,000 in a financial year are allowed for tax deductions under Section 80C of the Income Tax Act .
However, ELSS mutual funds have a lock-in period of three years, and you can’t redeem or transfer your ELSS investments during the lock-in period.
While ELSS comes with a mandatory lock-in of 3 years, most experts recommend you to stay invested for a much longer duration to optimise your returns.
Key Factors to Know Before Investing in ELSS
Before discussing how to invest in ELSS mutual funds in detail, consider the following factors to identify the right scheme for you.
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The Reputation of Fund House
Since investment in ELSS is usually for the long term, choosing a dependable fund house is crucial. Your ELSS should belong to a reputed fund house with long and consistent performance history.
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Fund Manager’s Track Record
The fund manager plays a key role in managing a mutual fund. The individual is responsible for creating a strong portfolio by picking the right stocks. Therefore, the person should be competent. Moreover, the individual should have a proven track record of driving a fund’s growth.
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Expense Ratio
The expense ratio is a percentage of your investment that the mutual fund house charges for managing the fund. Therefore, it is better to consider funds with a lower expense ratio.
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Fund’s Performance
Checking the fund’s performance is crucial. The fund should have a history of outperforming its benchmark index or competitors regularly. Check records of at least 5 years or more to get a good idea.
How to Invest in ELSS Funds?
Before knowing how to invest in ELSS funds, ensure that you’re KYC (Know Your Customer) compliant. If not, complete your KYC first. You can easily submit your KYC online through the mutual fund’s website or the RTA (Registrar and Transfer Agent) website.
Once you’re KYC compliant, you can purchase ELSS from an authorised mutual fund distributor or the mutual fund office. However, purchasing ELSS online is the most convenient and recommended way.
Now, let’s understand how to invest in ELSS online through the following easy steps.
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Visit the official website of the mutual fund and select the ELSS you want to invest in.
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Select the investment type- SIP or Lump Sum
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Submit your PAN and Date of Birth. The website will automatically retrieve your KYC data.
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Verify your KYC data and fill up some additional personal information in the online form.
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Fill out your investment details like ELSS name, investment tenure, amount, etc.
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Pay the amount online to begin your ELSS investment.
What Are the Features of Investing in ELSS Funds?
In addition to tax benefits, ELSS schemes provide the following additional feature.
Flexible Investment Options
You can begin your ELSS investment through a SIP of just ₹500.00. There is no cap on the upper limit. You can increase your SIP amount later as your income rises. Such flexibility allows you to continue your ELSS investments for a long time without any hassle.
Click Here to Know What is SIP?
Potentially Long-term Returns
ELSS is one of the tax-saving products that offer market-linked returns. Therefore, ELSS has the potential to offer long-term returns.
Short Lock-in Period
ELSS has a lock-in period of 3 years. Therefore, the relatively shorter lock-in period can provide more medium-term liquidity to ELSS investors.
Who
Who Can Invest in ELSS?
Any Indian citizen can invest in ELSS. However, ELSS can be opted by salaried individuals and first-time investors since it aims to provide the dual benefit of investing and tax-saving. Besides, it is one of the ways to gradually taste the murky waters of the stock market without taking too much risk.
Ways to Invest in ELSS Funds
Like most mutual funds, there are two ways to invest in ELSS funds. Invest through SIPs or make lump-sum investments. The right choice would depend on your financial goals, time duration, and risk appetite.
However, there is one thing to note. Since ELSS funds come with a lock-in period of 3 years, the lock-in of each SIP is set from the date of investment.
Click Here to Calculate SIP
Investment Options in ELSS Funds
Once you know how to invest in ELSS, you can select from the following two investment paths.
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Growth Option
The investor doesn’t get any pay out of IDCW (Income Distribution cum Capital Withdrawal) when selecting the growth option. Instead, the investment gain is in the form of appreciation of the fund’s Net Asset Value (NAV).
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IDCW Option
If you choose the Income Distribution cum Capital Withdrawal (IDCW) option, you can receive payouts when the scheme earns an excessive profit. The payout and frequency are at the discretion of the management.
ELSS Funds - More than Just a Tax Saving Tool
While ELSS funds allow you to save tax, that should not be the only reason to invest in them. ELSS funds can help you build a well-balanced portfolio carrying a long-term return potential. Being an equity fund, they can give market exposure. Choose the right ELSS based on their investment objective, past history, and the fund house's reputation.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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