ELSS has a lock-in period of 3 years and has the potential to provide you high returns linked to the market.
When it comes to saving tax, Equity Linked Savings Scheme (short for ELSS) of mutual funds is one of the most favoured investment options. It has a lock-in period of 3 years and has the potential to provide you high returns linked to the market. Moreover, there is no limit to making investments in these schemes. However, one should devise a proper strategy while investing in ELSS to gain good returns over a period of time. This is because the returns are market-linked and not guaranteed.
Here are four important strategies that one should adopt while investing money in ELSS.
Invest in lump-sum or in SIP mode?
Harsh Gahlaut, CEO, FinEdge said that the best way to invest into an ELSS is to plan ahead by taking stock of your projected Section 80C deficit at the start of the financial year, and then start a monthly SIP to cover the gap. Not only will this make it easier on your pocket, it will also smoothen your long-term returns through rupee cost averaging.
“Even if you have a lump sum to invest in ELSS, it is advisable to exercise caution, given the rich market valuations right now. Lump-sums can be staggered into an ELSS by parking the money into a liquid fund, and starting an STP (Systematic Transfer Plan) that will complete the deployment into the ELSS within the requisite time frame,” Gahlaut said.
Should you invest in the same fund again?
Investors are at times confused on whether they can invest in the same fund in which they invested in the previous year. Also, how will they get the tax benefit and on maturity how much money they should redeem? Investors can invest in the same ELSS scheme in which they had invested their money in the previous years either in form of a lump sum or through an SIP mode. However, you need to keep a track and monitor the fund performance before investing in the same fund.
Kaustubh Belapurkar, Director Manager Research, Morningstar Investment Adviser India Pvt. Ltd. said that you can invest in the same ELSS every financial year. In fact, you can invest as much as you like in an ELSS scheme, but you will get tax benefits only up to the prescribed tax exemption limit of a maximum of Rs 1,50,000.
“The tax benefit is given basis the transaction date, as long as the investment(s) are made in the same financial year for which you are seeking tax benefits. After completing 3 years, you can place a redemption request for the units that have completed 3 years or more,” he added.
Link it to your financial goal
Make sure you align your ELSS investments to a long-term goal such as your retirement or your child’s education. Doing so will remove the fixation on the 3-year lock-in period and allow you to benefit from a longer investment horizon in the process. In our view, 3 years is too short a time frame for an equity investment anyhow, and investors should ideally not confuse the mandated lock-in period with the ideal holding period for an ELSS.
Create an investment cycleWhile investing money in ELSS regularly in every financial year, you can create an investment-free cycle after the third year of your investments. From the fourth year onwards you can even choose not to invest money from your pocket and still avail tax benefits. Yes, once your first year investment reaches its maturity, after the third year you can redeem the same amount and invest it in the fourth financial year to avail tax benefit. Similarly, the process can be continued for any number of years.