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Things you need to know about ELSS

Tax season is around the corner and you must ensure that you have invested the right amount in a feasible tax saving instrument so that the government does not deduct a chunk of your hard earned money. But if you forgot to plan your investments at the beginning of the fiscal year, you will have to make a lumpsum investment so that you can submit that for investment declaration in your employer’s portal. In such a scenario, investing in Equity Linked Savings Scheme (ELSS) makes more sense. Not just that. Even if you want to plan your tax investments in a systematic manner, you can consider ELSS for bringing down your overall taxable income.

Today we are going to discuss ELSS and things that you need to know before investing in this tax saver fund.

What is ELSS?

An Equity Linked Savings Scheme is a mutual fund scheme that is commonly referred to as ELSS. ELSS is an equity mutual fund scheme that offers tax benefits. Investors can invest up to Rs. 1.5 Lacs every fiscal year in ELSS and claim a tax deduction for the same.

Here are a few things you need to know about the ELSS fund:

It predominantly invests in equity: The name of this tax saving mutual fund scheme is Equity Linked Savings Scheme. ‘Equity Linked’ means an investment scheme that is linked to the equity markets. Of its total assets, an ELSS fund may invest anywhere between 65 to 80 percent in stocks and other equity related instruments of publicly listed companies. This means that ELSS is a very high investment risk that also has the potential to generate better risk adjusted returns.

ELSS has the shortest lock-in period – ELSS is a tax saving scheme and comes under Section 80C of the Indian Income Tax Act, 1961. If you compare other tax saving instruments under Section 80C like Public Provident Fund or  Bank Fixed Deposit (FDs), ELSS has a short lock in period. Once you invest in ELSS, you cannot redeem your investments for at least 3 years from the date of investment. You cannot even partially withdraw your money that is invested in ELSS as it remains locked in for a minimum period of three years.

ELSS is ideal for long term wealth creation – Since ELSS is an equity oriented mutual fund scheme, investors generally invest in it for a longer duration. So, if you are investing in ELSS make sure that you have an investment horizon of at least five years or more. The longer you remain invested and continue to invest systematically the more chances you have of earning higher capital appreciation. Investors with financial goals that require long term wealth creation plan and know that they are going to have to invest in a tax saving scheme till they retire consider ELSS investments.

ELSS has SIP and lump sum investment options – Investors can either invest in an ELSS fund by making a one time lump sum investment or they can consider investing via SIP. A Systematic Investment Plan is the best way to create long term wealth with the ELSS fund as it allows the investor to save and invest a fixed sum at a periodic interval (typically every month) till the investor’s investment objective is accomplished. The ELSS investor can even use SIP calculator, a free tool that lets you calculate assumed future returns that your SIP investments can possibly fetch.

Like any other mutual fund investment scheme, ELSS does not guarantee returns. Talk to your financial advisor before investing.