ELSS stands for Equity Linked Savings Scheme. These are a type of mutual fund that is aimed at saving tax and invested in equity markets that qualify for tax exemption under Section 80C of the Income Tax Act. A total of around Rs. 1.5 lakh can be deducted from an investor’s total taxable income every year.
There are several types of investment schemes like the provident fund, national pension scheme, and the national savings certificates but the reason behind choosing ELSS is that it provides the highest returns of all. However, the returns remain subject to market ups and downs.
6 things to keep in mind before investing in ELSS:
ELSS has a lock-in period of 3 years which is relatively lesser compared with other funds. Here are some important tips to keep in mind while you choose from the best ELSS mutual funds:
ELSS can be invested across large, medium and small-cap market stocks. Some savings are predominantly applied in large-cap markets to boost stability and earn higher profits. Others are invested in medium to small-cap markets. This indicates that they have the potential for higher growth returns for investors if the economy is stable while there could be major losses if the market is not in favour. So, it depends on you to choose accordingly.
Concentration of Stocks
The number of stocks and the percentage of the portfolio in the stocks gives a fair idea regarding the concentration of stocks and the risks associated with it. Some can purposely hold portfolios of around 30 stocks as a strategy. Too concentrated portfolios mean that if some stocks underperform, it can affect the entire portfolio. On the other hand, too diversified portfolio can dilute the performance of individual components and the fund may fizzle out.
Selection of the best ELSS as per your comfort with the portfolio strategy is the best option instead of going for historical returns or the best performer in the previous year as market forces could have been different. Choose fund according to the performance of it consistently by evaluating market returns and checking whether it can perform above the benchmark if the conditions are favourable and not fall less when the market is down.
Although the lock-in period in ELSS is ideal, still investors must look at a longer period of holding to achieve capital appreciation. This is true for small and mid-cap funds because three years may not be enough to reverse the downward trend and gain capital appreciation. You may choose the SIP mode of investment to work the market volatility in your favour by investing in small amounts instead of lump-sum to average out the cost.
Include in the overall plan
You shouldn’t just invest in ELSS carelessly. Study the context of your financial situation after the payment of your children’s fees, mortgage repayment, payment of insurance premium and thereby, choosing the best fund for you as it is subject to market risks. The current rate at which ELSS is taxed is 10%.
Don’t invest just to save tax
ELSS schemes provide tax benefit but since they are equity schemes only there is always a risk associated with it. But, if you can be patient enough you can reap rich dividends. Care must always be given to the consistent performing schemes which can withstand the ups and downs of the stock market.
These are some of the facts you should keep in mind before investing in ELSS. Choosing the right one from the best ELSS mutual funds is crucial. But, the basic thing is to keep an eye out for all the probable factors that determine returns and then, choose accordingly.