6 Simple Steps to Invest in ELSS Funds

24-June-2021 |

Equity Linked Saving Scheme (ELSS) is a type of tax-saving mutual fund that allows you to hit two birds with one stone - tax deduction and wealth creation. ELSS investment should be considered when you undertake tax planning and wish to have regular returns. Benefits such as a short lock-in period, no upper cap, and the potential of highest returns in the tax-saving category make ELSS investments attractive. There are six simple steps to invest in ELSS, and this piece will guide you through them all.

 

     1. Understand the features of ELSS

 

Before you make any investment, it is crucial that you understand what you’re getting into and what benefits you’ll reap. While ELSS is a popular tax-saving investment, it also doubles up as an investment for wealth creation. ELSS funds have a 3-year lock-in period, and this is the lowest lock-in period among the tax-saving investments in the country.

 

An ELSS investment portfolio primarily consists of equity investments (60 to 80%) with certain fixed-income securities. ELSS investments cannot guarantee returns because they are equity-focused and are vulnerable to market volatilities. However, this risk is mitigated well if your investment horizon is more than 5 years. ELSS investments are the only tax-saving investments that tend to offer inflation-beating returns. 

 

     2. Choose the right ELSS fund

 

To choose the right ELSS investment, you first need to consider a few things. Start with deciding what your investment horizon is. For ELSS investment, an investment horizon of more than 5 years is a good start. This is because the maximum amount of funds are invested in equity and equity-linked securities, making them vulnerable to market volatility. An investment horizon of 5 or more years helps reduce the risk of volatility.

Like you would do with all other investments, looking at the past performance of the fund is a prudent step to take. While the past performance doesn’t guarantee returns, it does give you an insight into the abilities of the fund house and the fund manager. 

     3. Select between the growth and dividend options

 

This is one of the important steps to invest in ELSS. As an investor, you have two options for ELSS investments - the growth option and the dividend option. In the dividend option, you will receive dividends whenever the fund makes a profit. This can be distributed on a quarterly, half-yearly, or annual basis. For this, the relevant units of the scheme are redeemed.

 

In the growth option, instead of receiving the dividends when the fund makes a profit, the profits are reinvested in the fund. Due to this, the NAV rises when the fund makes a profit and falls when it makes a loss. Both the options make for a good investment choice, and you need to check what suits you better. For instance, if you depend on your ELSS investment as a regular source of income, it may be helpful to opt for the dividend option.

 

     4. Decide on the mode - SIP or lump sum

 

You can decide whether you want to invest in ELSS through SIP or in a lump sum. Investors tend to opt for the ELSS monthly investment SIP option because of its biggest advantage—it allows you to invest in the fund across different business cycles. Hence, the fund manager can buy fewer or more units depending on whether the market is up or down.

 

The benefit of ELSS investment in a lump sum is realized only when the markets show bearish tendencies, and you have two things - a long investment horizon and a higher risk appetite. Since in this option you miss out on the advantage of investing across multiple business cycles, it would be wise to stay invested for a longer period to get the desired returns. 

     5. Determine the amount you want to invest

 

ELSS investment does not have an upper cap, and the minimum amount varies, depending on the fund house, but is as low as ₹ 500. Both these features offer a great upside. If you don’t have a lot of money left for investments after meeting your expenses, you can still invest in ELSS. On the other hand, you can invest a higher amount to capitalize on the tax-saving benefit under Section 80C of the Income Tax Act, 1961.

Under Section 80C, ELSS funds are eligible for a tax deduction of up to ₹ 1.5 lakhs from your annual taxable income. For instance, your annual taxable income is ₹ 15 lakhs. If you invest ₹ 1.5 lakhs in ELSS, you can opt for a tax deduction and reduce your taxable income to ₹ 14.5 lakhs. Depending on the tax slab you fall under, you will save a significant amount of money. It is essential to note that this will apply only if you are following the old tax regime. 

     6. Pick your distributor

 

To start an ELSS investment, you can directly go to the fund house’s branch or invest in ELSS online through their website. However, many investors prefer to go through an intermediary or distributor. This can take care of the technical aspects, such as the paperwork, and streamline the process for you.

Typically, mutual fund distributors do not charge any fees as they earn commission from the fund houses. You will receive a folio number once you’ve made the ELSS investment. This folio number of the mutual fund house can be used for making future investments in the ELSS scheme.

 

Conclusion

ELSS is a popular investment choice because of the twin benefits of tax-saving and wealth creation it offers. When it comes to investing, you should always look out for instruments that offer such dual benefits. Savings insurance is another such option that offers the financial protection of a life insurance plan while also building your savings.

 

Tata AIA Life Insurance has a host of savings insurance schemes that you can choose from to ensure you cover all bases for a good investment portfolio. You not only get the essential financial protection of a life insurance policy to take care of your family but also guaranteed1 returns, which help meet life goals smoothly and surely.

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