Equity Linked Savings Scheme- ELSS
ELSS is a tax saving mutual fund that is eligible for Section 80C benefits along with the other investments listed, for a maximum amount of Rs.1.5 lakh a year.
ELSS is an equity portfolio that invests in a diverse set of equity shares. It can hold some cash defensively, but is primarily an equity investment.
ELSS has a lock-in period of three years (lowest among 80C investments), after which the investor can withdraw the funds for short-term goals, besides retirement.
The dividends are tax-free and redemption after three years will not attract capital gains tax, as the holding period is over 12 months.
Fund performance and portfolio are disclosed monthly and investment can be made in lump sum, through SIP or as desired into a folio.
The returns are great, but avoid these mistakes that many tend to make:
Investing a lump sum at the end of the year: SIPs are by far the best way to invest in these funds. AMFI data shows that nearly 50% of the total inflows into the ELSS category happen in the last three months of the financial year. The month of March alone accounts for 22-25% of the total inflows. Instead of taking the safer and more convenient SIP route, taxpayers get caught up in the year-end rush and invest a lump sum in risky assets.
Basing your choice on short-term performance: The other big mistake is to look at the short-term performance of the funds and go with the best performer. ELSS funds are equity schemes, and the stability of the returns is more important than the quantum of gain. Look at the 3-year and 5-year performance of the scheme before you make a choice.
Choosing the wrong option: Dividends from mutual funds are just another way of booking profits.The dividend you receive gets deducted from the NAV, so you don’t really gain anything. If you have invested in ELSS funds for the long term, don’t go for the dividend option. The dividend reinvestment option is even worse. Every time the fund gives out a dividend and reinvests the money into your account, the three-year lock in period starts all over again. In effect, you are locked in for perpetuity.
Ignoring smaller funds: Don’t base your choice on size but go by the performance.
Redeeming after lock-in: Don’t treat your ELSS funds as a short-term investment. There is a difference between lock-in and maturity. NSCs and tax-saving fixed deposits mature in five years and therefore the money comes back to you after five years. ELSS funds have a three-year lock in period, but this doesn’t mean you should redeem the investment after three years. Look at ELSS funds as regular equity funds that should be held for the long term.