How to Invest in ELSS Funds?
The large percentage of the people investing in ELSS fall within the age group of 24 to 30 years, says an article on The Economic Times. The awareness of tax saving mutual funds and the flexibility of the products have attracted today’s well-educated and financially savvy youth. If you too are looking to save income tax, while making the most of investing in equities, ELSS could be a great choice for you.
Things to Know Before Investing in ELSS Funds
When you invest in mutual funds, you become eligible for tax deductions under Section 80C of the Income Tax Act of up to ₹1.5 lakh. The best way to make a wise decision is to keep these 5 things in mind.
1. Know the Lock-In Period of Investment
Equity Linked Savings Schemes have a lock in period of 3 years. This means you are not allowed to redeem your investment before 3 years. In comparison, PPF and NSC come with lock-in periods of 15 and 5 years, respectively. Although this makes ELSS look like a short term investment, you need to have a long term investment horizon of 7 to 10 years at least to get the best returns.
2. Tax Exemption Limitation
Wondering how to save income tax? With ELSS, you can save up to ₹1.5 lakh from your taxable income. But, this is an overall limit. For example, if you have already claimed ₹1 lakh through CPF or other investments, you can avail only ₹50,000 as tax exemption on the ELSS. You can actually use an online tax savings calculator to figure out your savings.
3. Positive Risk Return Trade Off
Technically, ELSS are riskier than investing in debt funds, given that the stock market tends to fluctuate more. However, such funds invest your money across a wide range of industries to minimize risk exposure. Given that they offer higher returns than debt funds, the overall impact is evened out in the long term.
4. Link ELSS with Long Term Goals
Consider beginning your investment with long terms goals in mind. If you decide to put in ₹1.5 lakh in your fund every year, remember that it is a part of the long term goal and the tax saving SIP (Systematic Investment Plan) will be tagged accordingly.
5. Maximum Returns Expectations
These funds generate higher returns than any other investments. However, no market-linked investment can guarantee returns. You need to stay invested for a longer investment horizon to make the most of your investment. In the long run, ELSS is sure to provide you with above average returns.
Make sure you let your investment complete an entire cycle. This will help you to figure out the highs and lows of the market. Therefore, stay invested as long as you can.