Looking To Invest in ELSS to Save Tax? Know Things to Consider Before Choosing

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Basis a recent report by the Association of Mutual Funds in India (AMFI), as on 30th November, 2019, around 20% of the total equity investor folios are invested in ELSS tax saving mutual funds. Thus, it isn’t shocking when several investors prefer to invest in ELSS to earn significant returns while saving tax. However, before you decide to invest in ELSS, here are 5 things you must keep in mind:

How much should you invest?

Let us assume that Gaurav would be saving Rs 4 lacs this year. He wishes to invest in mutual funds to earn significant returns. He has contributed Rs 50,000 in other Section 80C instruments such as Public Provident Fund (PPF) and Employee Provident Fund (EPF. Then, the right investment amount to invest in ELSS funds will be Rs 1 lacs for that financial year. He might consider allotting the remaining Rs 3 lacs towards equity funds that do not have any lock-in tenure. Remember, the upper limit of availing of tax exemption under Section 80C is Rs 1.5 lacs.

When to invest in ELSS?

Just like any other types of mutual funds, ELSS funds are expected to face volatility throughout a year. Dedicating a lumpsum towards ELSS might lead to frightful returns if you enter the market during a bullish market cycle. Thus, mutual fund experts recommend a monthly SIP to benefit from the concept of rupee cost averaging. SIP (systematic investment plan) is a systematic and disciplined way to invest in mutual funds. 

When will you get back the invested amount in ELSS?

Redemption in ELSS funds via lumpsum mode is made after three years from the date of investment. Redemption in ELSS funds via SIP mode occurs on first in first out basis. For instance, if you have deposited a monthly instalment on 5th March 2020, then you can redeem it on 5th March 2023. Similar redemption cycle is adopted for other months’ SIP investment.

Should you invest in ELSS funds that your friend/family has invested in?

No, you should not invest in ELSS just because your kin have invested in it and are urging you to invest in it. You should invest in ELSS based on your financial goals, investment horizon, and risk profile.

Should you hold out on your ELSS investments for a prolonged period?

Although ELSS funds come to have a mandatory lock-in tenure of just three years, investors are advised to stay invested for a longer duration, say ten years or more. Historically, mutual funds have proved to perform better when invested for a longer duration. Experts often advise their investors to link their ELSS investments with their long-term financial and investment goal. This is done so as to not be tempted to exit the market at the slightest hint of volatility.

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