Equity linked savings schemes popularly called ELSS, is an investment-cum-tax saving scheme in India. In ELSS, most of your money is invested in stocks. It is a good way to get exposure to equity markets.
In an ELSS, the fund manager chooses the best Companies to invest, especially those which enjoy good growth. ELSS not only offers high returns, it also gives tax benefits under Section 80C. You get a tax deduction up to Rs 1.5 Lakhs a year.
Let’s take a look at the 5 things you should know before investing in ELSS. Want to know more on ELSS? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.
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ELSS is an equity diversified mutual fund which invests most of your money in stocks across sectors. ELSS grows wealth and you enjoy tax benefits. ELSS is one of the faster ways to grow rich.
Always invest in an ELSS scheme which has a five star rating. Select an ELSS with low expense ratio to maximize returns. Expense ratio is the sum total of all charges in a mutual fund. A good ELSS could give 11-14% returns over a 3-year period. It’s even more over a 5 year period.
Before investing in ELSS, do know that it has a 3 year lock-in period. This means you cannot withdraw the money for 3 years. Don’t invest in an ELSS if you are not comfortable with stocks or cannot bear a lock-in period of 3 years.
The lock-in of 3 years is very low, compared to PPF lock-in of 15 years and NSC which has a lock-in of 5 years. ELSS enjoys the shortest lock-in among all tax saving instruments under Section 80C. ELSS is an equity investment and must have a time horizon of at least 5-7 years.
Equity investments are for the long term and are generally safe over 3-5 years. ELSS forces you to stay invested for at least 3 years, and this means you are likely to enjoy high returns. Stay invested in ELSS for at least 5-7 years to get great returns, even though the lock-in is just 3 years.
ELSS is a great way to get invested in equity. It is a good way to take baby steps in equity, instead of directly investing in stocks. You get the benefits of a diversified investment and a professional fund manager, thrown in.
You can invest just Rs 500 a month via SIPs (a method of regularly investing small amounts in mutual funds) in ELSS. This way, you don’t need to time the market, just spend time in the market.
If you have excess money (a hike or a windfall), do consider investing in ELSS and enjoying good exposure to equity.
ELSS invests in stocks and are a high risk investment. Its high returns, but at high risk. ELSS can be a very risky investment to a newbie. There are chances of fluctuations in the Net Asset Value or NAV.
There’s a way of overcoming volatility in ELSS. This involves staying invested for the long-term. Try to stay invested in ELSS for at least 5 years, as this is an excellent way to cut risk in investment. The returns from ELSS beats most investments over the long-run.
You enjoy the Section 80C benefit up to Rs 1.5 Lakhs a year. The returns are tax free, but long term capital gains (LTCG) after the 3 year lock-in, are taxed at 10% for gains over Rs 1 Lakh a year.
ELSS saves Rs 46,800 a year in taxes, especially for high tax bracket investors. Find this difficult to understand? I’ll explain. You get the Section 80C benefit up to Rs 1.5 Lakhs a year. If you are in the 30% tax bracket, this is 30% of Rs 1.5 Lakhs = Rs 45,000 a year.
Then there’s a savings in cess of 4% which is Rs 1,800. This works out to a savings of Rs 46,800 a year. You can save more on investing in direct ELSS schemes where commissions are not paid by the mutual fund house to the mutual fund distributors. The savings in commissions are passed on to you and other investors by the mutual fund house.
You have the growth and the dividend option in ELSS. If you choose the growth option, you enjoy compounding benefit. The money gets reinvested and you enjoy the compounding benefits of return on return. You get a lump sum after 3 years.
You can also choose the dividend option where dividends are paid out at various periods of time. You enjoy liquidity even in the lock-in period.
It’s wise to reinvest the dividends back in the ELSS scheme or any other equity diversified mutual fund scheme. Dividends are great for retired people, but a young investor should look at high growth. It would be wise to invest in the growth scheme of an ELSS and enjoy the compounding benefit of return on return.
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