ELSS stands for Equity Linked Savings Schemes. ELSS are diversified Equity Mutual Funds that invest mainly in equity and equity-related instruments. ELSS invests in companies with strong growth potential and a resilient business model.
Many new investors hesitate to invest in ELSS on learning about the high exposure to equities. However, studies show that equities give superior returns if you stay invested for the long term.
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5 Things You Must Know Before Investing In ELSS
Types of ELSS:
ELSS is of two types:
1. Dividend funds
2. Growth funds
1. Dividend funds:
Dividend funds are further classified as Dividend Payout and Dividend Reinvestment. If you opt for Dividend Payout, you will receive tax-free dividends. On the other hand, dividend by way of Dividend Reinvestment is reinvested as a fresh investment. With this money, more units are purchased.
2. Growth Funds:
Growth Funds are meant for long-term wealth creation. It is cumulative in nature. The full value of such investments are realized on redeeming the fund.
Methods of investment in ELSS:
Investors can invest in ELSS in two ways:
1. Lump sum
2. SIP (Systematic Investment Plan): SIP is a way of investing in Mutual Funds. It involves investing a fixed amount of money each month on a specified date. SIP gives the benefit of rupee cost averaging.
Important points to keep in mind before investing in ELSS:
1. Exposure to equity:
Investors are hesitant to invest in equity because of market volatility. You should have sound knowledge of stock markets to directly invest in equity. Newbie investors wishing to invest in equities may start with ELSS funds. This is an ideal way to get exposure to equities.
ELSS is managed by professional fund managers. You can start investing in ELSS with a nominal initial investment. You can choose to start with a systematic investment plan (SIP) by investing amounts as low as Rs 500 a month. As ELSS is professionally managed, you stay tension free and far from the hassle of timing the market.
2. Lock-in period:
Investment in ELSS comes with a lock-in period of three years. ELSS has the shortest lock-in period among all tax saving investments coming under Section 80C. Public Provident Fund (PPF) comes with a lock-in of 15 years and National Savings Certificate (NSC) with 5 years.
Once you invest in ELSS, you cannot redeem the investment for a period of 3 years. Parking your surplus funds in Equity Linked Savings Schemes (ELSS) for 3 years earns great returns.
Even though ELSS has a lock-in of 3 years, it is good to have a long-term investment goal. Investing in ELSS for the short-term will not give great returns. ELSS is an equity investment. It will give great returns if held for at least 7 to 10 years. Moreover, attaching financial goals to ELSS investments will make you a committed and dedicated investor.
SEE ALSO: How to Invest in ELSS
Equity being a major component, ELSS has a potential to generate higher returns in the long-term. This doesn’t mean you expect unrealistic returns. Investments like equity which are exposed to high risks have a potential to earn high returns but such returns are not guaranteed.
Also, don’t expect returns to remain consistent each year. It is safe to expect a tax-free return of around 9-10% a year over the long term.
The basic nature of equity funds is high risk. Therefore, Net Asset Value (NAV) is not free of fluctuations. With high risks come higher returns. Just stay invested for a long time.
5. Tax exemptions:
Section 80C of the Income tax Act, 1961, offers tax benefits on various investment avenues like Employees Provident Fund (EPF), Public Provident Fund (PPF), life insurance policy premiums, Home Loan Principal and so on. These investments are eligible for tax deductions. Under this section, taxpayers can claim a maximum collective tax deduction of Rs 1.5 Lakhs a year.
Therefore, if you have claimed exemptions relating to other investments, the entire investment in ELSS may not qualify for a deduction. Example: You have the following investments for the Financial Year 2017-2018.
PPF: Rs 70,000
NSC: Rs 50,000
ELSS: Rs 50,000
If you have already claimed investments made in PPF and NSC (70,000 +50,000= 1,20,000), you cannot claim the entire Rs 1,50,000 in ELSS. You can claim only Rs 30,000.
Investment planning is of utmost importance to enjoy growth and tax benefits.
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