Key things to keep in mind before investing in ELSS

Benefits of Equity-Linked Saving Schemes

1. ELSS is a tax saving mutual fund scheme offered by the mutual fund companies to retail investors.
2. Tax Exemption up to ₹1,50,000 u/s 80C of the Income Tax Act, 1961
3. The fund of the investor is invested in the listed equity shares.
4. The returns are higher than traditional schemes and dependent on market performance.
5. Dividends earned on these funds are Tax Free
6. Option for monthly investment as SIPs – minimum ₹500 per month
7. There is a minimum lock-in period of 3 years.

Things to keep in mind before investing in ELSS

1. Lock-in Period: Since, the ELSS has the shortest mandatory lock-in period of 3 years and therefore, investors with short term view tend to pull back their funds just after the ending of lock-in period, which is not advisable. The investment made in an ELSS should not be considered as a long-term investment and one should be ready to invest for at least five to seven years.
2. Risk Factor: The fact that puts off most of the investors is the risk associated with the ELSS. Since, ELSS funds are invested in the listed equity shares therefore, it carries a higher risk. Therefore, it is advisable to keep investing in ELSS funds for a longer time horizon as it reduces the risk.
3. Short-Term Vision: The investors should not be considering or judging any investments from short-term performance as it is advisable for the investor to invest in funds which are more consistent with returns.
4. Tax Benefits: The tax benefits are only allowed up to ₹1,50,000 under section 80C which considers the total investments made in Public Provident Fund, Employees Provident Fund, Fixed Deposits, Net Pension Scheme, Unit-Linked Insurance Plan etc. Therefore, if the total amount invested by the investor in all the allowed investment schemes under Income Tax Act along with ELSS exceeds the ₹1,50,000 then the individual will not get the tax benefits on the excess amount.
5. Accumulation of Funds: Investor should not accumulate too many ELSS funds in the portfolio as it leads to over-diversification and hinders the efficiency in monitoring the funds.
6. Switching Funds: Investor should not switch funds every 3 years due to the underperformance of funds but only if the underperformance continues for so long. In that case pulling back of funds can be the only suitable option available.
7. Dividend Trap: The dividend option should only be considered if you are in need of periodic income, else the growth option should be considered as it helps in wealth creation. The dividend paid only decreases your own NAV in the ELSS fund.