Tax saving: Five tips to get the best from your ELSS Mutual Fund

ELSS is not just a tax saving tool; it also builds wealth

The tax savings season is upon us. And Section 80C remains a popular tax saving tool in the hands of the taxpayer. One of the most popular tax saving investments is the Equity Linked Savings Scheme (ELSS), or tax saving mutual fund (MF) scheme. An ELSS is a diversified equity fund that invests in stocks across sectors and market capitalisation. You can invest up to Rs 1.5 lakh to avail Section 80C tax deduction benefits but you can put more than that as well. However, your tax deduction benefits will be limited to Rs 1.5 lakh.

Although ELSS has been around for decades — almost every fund house has one in its bouquet — there are five ways to maximise the benefits that come from ELSS.

Have one…at best two

How many tax saving investments do you really need?

Financial advisors say that since investors usually invest in ELSS once a year to claim tax deduction benefits, they tend to invest in a new –or rather, different – ELSS scheme every year. “I have seen portfolios with 7-8 tax saving funds. Most of these funds’ portfolios resemble one another but investors still have multiple ELSS funds,” says Anup Bhaiya, founder and Managing Director of Money Honey Financial Services.

Also read: Which are the two ELSS or tax-savings schemes that Moneycontrol recommends? Click here

Experts like Bhaiya recommend just one ELSS fund, at the most two. Consider this: Your overall mutual fund portfolio should consist of 8-12 schemes. Given that you need to invest across equity, debt, overseas and commodities (gold or silver funds), you could have anything between 4 and 6 equity schemes in your portfolio. Of these, one ELSS fund suffices.

SIP works better than lumpsum

Most of us invest in an ELSS scheme to be able to save tax. The way Section 80C tax deduction works is that your taxable income goes down to the extent of your investment amount, subject to a maximum of Rs 1.5 lakh. This is also why many distributors and advisors say that much of the inflows into ELSS come between January and March every year because that is when employers ask for tax investment proofs (see table).

Inflows in ELSS are seasonal

Experts say that it’s always better to invest in an ELSS through a Systematic Investment Plan (SIP). “Start a SIP on April 1; the beginning of a financial year,” says Parul Maheshwari, a Mumbai based certified financial planner. Maheshwari claims that due to investors making a last-minute rush, investors often look at last year’s winners and then invest. But as Moneycontrol has repeatedly pointed out, investing based on past performance doesn’t guarantee future performance. Pick a more consistent, middle-of-the-rung performer that is bound to give you a steadier, less lumpy, performance over time, comparatively.

Also read: Has the new income-tax regime killed ELSS?

An SIP in an ELSS fund has other benefits. “It is a continuous facility where money keeps getting invested in your chosen scheme. In other words, you don’t have to choose a new or different scheme every year. Which means, less botheration. It’s automated,” says Maheshwari.

Manage your lock-ins

Your money in an ELSS is locked in for three years, even if you invest in excess of Rs 1.5 lakh. But mind the lock-in when you put your money through SIPs. Each SIP instalment gets locked in for three years. Say, you start a 36-month SIP on January 1 2024. This means you will keep investing, once every month, till December 1, 2026. This doesn’t mean that you will be able to withdraw all your investments at the end of 2026.

This is because not all your SIPs have completed three years. In fact, your last SIP, which you would do on December 1, 2026, would actually start that day. Every SIP instalment gets locked in for three years. For you to be able to withdraw all your money, you will have to wait till December 1, 2029.

Consolidate

What if you already have multiple ELSS funds in your investment portfolio?

Maheshwari suggests you consolidate your portfolio. Aside from your fund house’s pedigree and vintage, take a look at how much corpus you have in each of these schemes. Chances are you might have schemes with less investment, given that most of us invest less than Rs 1.5 lakh in an ELSS scheme; just enough to earn the tax benefits. Take your money out of those schemes with small or negligible investments and consolidate your portfolio. Of course, you will have to check if such amounts are still under the 3-year mandatory lock-in.

Beyond tax-saving

This is ELSS' best–kept secret.

The long-term pull of an ELSS

It is not just a tax saving tool; it also builds wealth. You can invest in an ELSS even if you do not wish to get the tax benefits. And you can certainly stay invested in an ELSS fund beyond three years when the lock-in period gets over. A Moneycontrol analysis shows that ELSS schemes outperformed Flexi-Cap funds over a longer period of time and consistently. These schemes still give you exposure to equity and come with a good, long-term track record.