Personal Finance

5 Things to know before investing in ELSS

December 20, 2019

5 Things to know before investing in ELSS

Equity Linked Saving Schemes or ELSS are known as one of the most preferred avenues amongst tax-saving investment options. These are equity funds that invest a big portion of your money into equity and equity-related securities. While ELSS carry the dual benefit of wealth growth with tax saving, there are a few things you must keep in mind prior to investing in them.

ELSS has the shortest lock-in period

One popular feature of the ELSS funds is that it has the shortest lock-in period of 3 years when compared to other tax-saving options like PPF (15 years), tax-saving FD (5 years), etc. While this may be a highly lucrative feature that attracts investors, exiting the fund soon after the expiry of the lock-in period would prevent the fund from realising its full growth potential. When investing, whether it is for tax-saving purposes or for wealth growth, always invest with a long-term horizon in mind. A long-term investment could be anywhere from 5 or 7 years to more. Have long term goals when investing in ELSS and stay invested for the longer haul.

A gateway to equity exposure

If you are a new investor, ELSS funds could be your stepping stone to investing in equities. Not only do these give you the benefit of professional fund management, but you also get a well-diversified portfolio at a low investment amount when you invest via the SIP mode wherein a fixed sum of money will be invested towards your preferred ELSS fund every month. SIPs on Paytm Money start from as little as Rs.100.

Risk of investing in ELSS Funds

No matter what the sum of money you invest, it is crucial to know that since ELSS funds invest only in equity stocks of companies, they are subject to a relatively higher risk of fluctuation in their NAV (Net Asset Value) than the other tax-saving alternatives. One way to deal with this risk is to stay invested for longer, invest via SIPs and maintain a well-diversified portfolio. Historically, equity funds are known for generating above-average returns in the longer run by overcoming the short-run market volatility.

Tax Exemption Limit

There is a limit to the amount of tax deduction that you can claim for investing in ELSS funds. Regardless of how much you invest, your tax deduction will be limited to Rs.1.5 lakhs in a year. Another important point to keep in mind is that this deduction of Rs.1.5 lakhs is inclusive of other tax saving investment options covered under Section 80C of the Income Tax Act. If you have investments in PPF for a sum of say, 1 lakh, then the exemption on your ELSS funds would be Rs.50,000 only. This is crucial for you to take note of while calculating your post-tax gains.

Returns in ELSS aren’t guaranteed

While ELSS funds have a reputation of generating higher returns than traditional investment avenues, these are subject to market risks and do not guarantee returns. The historical performance of the fund is indicative of the progress of the fund thus far and can be taken into consideration for choosing a fund but it can in no way be a confirmation to getting the same returns. The fund will go through various market cycles and the best way to improve your chances for a higher return is again by staying invested for longer.

Whether you are new to investing or have been steadily securing your financial future, you must plan your finances in a manner that is inclusive of tax-saving options to maximize your returns. To invest in ELSS funds you can visit Paytm Money and pick from the top-rated funds we have enlisted on our app. For more details on investing in the right funds, download the Paytm Money App.