Things to consider and guard when you invest in ELSS

Numbers replicate an increase in people who are exploring options on how to invest in ELSS. Because of its popularity people are looking at ways on how to derive benefits. Obviously till 3 years back there was no major drawback with ELSS funds.

The benefits of ELSS fund

Tax savings

The amount which you invest in an ELSS fund under section 80 C of the Income tax act is liable to a benefit of 150,000. While investors can earn high returns from equity funds they can save on the tax frontiers.

Among various tax saving funds blessed with the lowest lock in period

ELSS is empowered with a lock in period of 3 years, and comparing it to 5 year options with other tax saving instruments. This is the lowest among all the tax saving options as it is 5 year for a fixed deposit and 15 years for a PPF fund. So ELSS with the lowest lock in period provides the highest return.

Option of SIP

While investing in ELSS you can opt for a SIP option. By doing so an investor can put in equal amount of money at periodic intervals. This paves way for the salaried class to invest a portion of their savings each month.

Transparent and safe

Investment in mutual funds is a safe and transparent process. All the companies of direct mutual fund app come under the preview of SEBI as they need to comply with full disclosures

The power of compounding

A general suggestion is to invest in equity based funds for a longer horizon around 10 years. By default having a specified lock in period ELSS follows the norms. In doing so this helps the investors to cash in on the power of compounding in the long run.

Higher returns

As ELSS funds operate on equities the returns are in the higher bracket of around 20 %. After 3 years the power of equity with compounding provides you substantial returns in the long run.

Limitations

Total benefits are limited

Tax benefits to the tune of 1, 50,000 are only available for a current fiscal year irrespective of the amount of money you are planning to invest in an ELSS fund. Suppose an investor goes on to invest, 1, 00,000 in a ELSS fund in each fiscal year, then only the benefits would be 1, 50,000

Making a foray into ELSS would depend upon the investment profile of an investor, their risk taking ability along with duration of investment among others.

Features

Just like the other mutual fund schemes a major difference with ELSS is that there is a minimum lock in period of 3 years. Though a drawback is no pre withdrawal option is allowed before you complete the lock in period.

Investment in ELSS can be made through a systematic investment plan. You can average out the cost of investment to shell out less money at a single go. Take into consideration that SIP has a lock in period of 3 years.

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