Things To Consider Before Investing In ELSS

The equity-linked saving scheme (ELSS) is a type of mutual fund, that encourages long-term investments in equity.  ELSS gives good returns over long periods of time. Many ELSS schemes have outperformed the stock market over the past 5 years. These funds are tax saving in nature and offer several benefits to investors.

The equity element in ELSS gives you the ability to build wealth. ELSS comes with twin benefits:

• It helps you save taxes.
• You enjoy the compounding benefits of return on return. The money you invest earns returns and these returns start earning for you.

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Things to consider before investing in ELSS

Some important things you must know before investing in ELSS.

1. What is ELSS?

Equity Linked Savings Scheme  (ELSS) is a  type of equity diversified mutual fund, that invests most of your money in equities. Under ELSS, most of the fund corpus is invested in equities or equity-related products. Some funds also invest a small corpus in debt securities. The main purpose of these funds is to grow your money over the long term. ELSS also come with tax benefits.

SEE ALSO: ELSS Or Equity Diversified Mutual Funds

2. How to invest in ELSS?

You can invest in ELSS either through lump sum (a single large investment) or systematic investment plans (SIPs). SIP is better as it allows you to invest in a disciplined manner.  Investing through SIP gives the benefit of rupee-cost averaging.

You can invest a small amount of Rs 500 a month via SIPs, in an ELSS.

3. Investment limits of ELSS funds

You can start investing in ELSS with a minimum amount of  Rs 500. There is no upper limit on how much you can invest in ELSS funds.

4. Lock-in period in ELSS

Your investment in ELSS will be locked for a time period of 3 years. You won't be able to redeem this investment during this period. However, you will be entitled for dividend payments if you choose the Dividend Option. 

Choosing the Dividend Option is not a good idea, as you lose some of the benefits of investing in ELSS. The money you receive as dividends would be spent, denying you the opportunity of staying invested and getting higher returns.

ELSS has the shortest lock-in period when compared to other tax-saving instruments like Public Provident Fund, Fixed Deposit and Kisan Vikas Patra.

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5. Tax benefits under ELSS

ELSS helps you save taxes.  ELSS enjoys the Exempt, Exempt, Exempt (EEE) benefit. The investments you make are tax-free up to Rs 1.5 Lakhs a year under section 80C. The returns and the money you get at withdrawal are tax-free.

6. Returns from ELSS

ELSS does not offer guaranteed returns, as returns you get are market-linked. Since your investment will be locked in ELSS for 3 years, you benefit by staying invested for long periods of time. Lock-in period in ELSS helps you grow your money by staying invested in the market and not selling, during sudden falls in the stock market. Be Wise, Get Rich.