5 things you need to know before investing in ELSS

Investing in ELSS funds makes you eligible to avail tax deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961.

Things to keep in mind as an investor

ELSS funds happen to be the most efficient way to grow wealth and enjoy tax benefits. However, there are certain things you need to keep in mind before investing in ELSS.

1. Good way to get exposure to equity markets

It might be possible that you desire to invest in equities but don’t know where to start. Try ELSS funds as your first step. As compared to directly investing in stock markets, ELSS funds are an ideal way to get exposure to equities.

Along with professional fund management, you get the benefit of a well-diversified portfolio at a nominal initial investment. You may initiate a systematic investment plan (SIP) of as low as Rs 500 and stay tension free from timing the market.

One thing that you need to be aware of is that ELSS comes with a lock-in period of three years. In case you can block your surplus funds for such period, ELSS funds is a wonderful way to enjoy potential of equity stocks.

2. Lock-in period of investment

Among all other tax-saving products offered under Section 80C, equity linked savings schemes (ELSS) has the shortest lock-in period. It has a lock-in period of 3 years which means that you cannot redeem your investment before completion of 3 years. Comparatively, a Public Provident Fund (PPF) has a lock-in period of 15 years and National Savings Certificate (NSC) comes with a lock-in period of five years.

Having said that, you should not perceive ELSS funds as a short-term investment haven. ELSS, being an equity investment, need you to have a long-term investment horizon of at least 7 to 10 years. Additionally, you have to be goal-oriented while investing in ELSS funds to ensure that you can make the most of the investment.

3. Risks involved in investment

ELSS funds invest mostly in equity stocks of companies. Equity funds carry a higher risk of fluctuation in Net Asset Value (NAV). Owing to this, ELSS funds may seem a risky proposition to a budding investor. However, this should not deter you from taking the benefit of such investments.

All you need to do is stay invested for a longer investment horizon. As compared to other asset classes, equity funds have found to give above average returns in the long run. It does this by overcoming the volatility which the fund returns undergoes in the short run.

4. Maximum tax exemption limit

Section 80C is an extensive section which includes numerous investment avenues, like Employees Provident Fund (EPF) and life insurance policy, that are eligible for tax deduction. The maximum tax exemption limit available under Section 80C is Rs 1.5 lakh. If you have already claimed some of the exemption via other investments, then your entire investment in ELSS may not be available for deduction. Thus, before finalising your investment amount do remember to perform some basic calculations to make an informed decision.

5. Expectation of maximum returns

Being an equity-oriented investment, ELSS funds have the potential to generate higher returns than other investment avenues. But you cannot be unrealistic about returns on investment. Moreover, there are no guaranteed returns in equities. The fund performance may vary across different time horizons. Only when you stay invested for a longer investment horizon, could you hope for higher returns.

Conclusion

The best way to approach ELSS funds is to make a detailed plan at the start of the financial year. Don’t postpone your tax-saving investments late in the year. A goal-oriented and planned approach will help you to select the right ELSS fund that suits your requirements.

(The writer is Founder & CEO ClearTax.)