Tax season is about to get over and if you haven’t yet decided on how to spread your finances across tax saving instruments, you can consider investing in ELSS. There are several investment options for Indian tax payers, but ELSS is known to not only help you save tax but can also help you achieve capital appreciation over the long term. Equity Linked Savings Scheme is an open ended equity mutual funds scheme that comes with a statutory lock-in and tax benefit. ELSS is the only mutual fund scheme to offer tax benefit. If this is your first tax planning season, you can consider adding ELSS to your investment portfolio. ELSS is ideal for investors with a moderately high risk appetite, for someone who is young with an aggressive investment approach and a long term investment horizon.
Here’s an example to help you understand how ELSS works –
GunjanKhemani, a senior marketing manager earns Rs. 13.5 lakhs per annum. This makes her fall under the 30 per cent tax slab. Gunjan learns about ELSS and decides to invest in this tax saving scheme. According to Section 80C of the Indian Income Tax Act, 1961 you can invest Rs. 1.5 lakhs per fiscal in an ELSS scheme and claim tax deductions for the same. By investing in ELSS,Gunjan has brought down her tax liability and he will now be taxed Rs. 12 (13.5- 1.5) lakhs only.
How to evaluate the performance of you ELSS fund?
If you are investing in ELSS funds for the first time, make sure that you take a look at the past performance of the fund before investing. Investors can look how the ELSS fund has performed in the past six months, one year, three years and five years. They need to also compare the ELSS fund’s performance with other schemes that fall in the same category. An ELSS fund is worth investing if it has been a consistent performer in the past. An ELSS with a consistent returns streak is far better than the one that has offered higher returns in the past one year. It is always a good idea to invest in a fund that has offered stable returns instead of going with the highest performing fund.
Also, if the fund that you invested in, has been not been performing like its peers, then you might have to stop your investments in that fund and switch to a better performing fund. Remember that ELSS comes with a mandatory three year lock in period. So, although you cannot redeem your ELSS funds for a minimum period of 36 months, you can stop investing. The amount that was invested so far shall continue to earn interest.
If you want to make the most out of your ELSS investments, then you can consider starting a SIP in ELSS funds. A Systematic Investment Plan is an easy and hassle free way of investing in mutual funds. Investors can now invest small amounts every month in ELSS instead of invested the entire investment amount. This way, they can stop or skip their SIP investments as per their convenience. If you are a KYC complaint individual, you can invest in ELSS scheme via SIP from the comfort of your home or office. Investors can also refer to SIP calculator, a free online tool to help you determine how much corpus your monthly SIP investments might accumulate at the end of the lock in period.
These are some of the ways to can evaluate the performance of your ELSS funds. If you are new to mutual funds, then do consult a financial advisor before investing.