ELSS stands for equity-linked savings scheme. It is an equity fund variant known for offering tax benefits. You can enjoy tax advantages under Section 80C of the Income Tax Act, 1961. Under Section 80C, you can claim a tax benefit of up to ₹1,50,000. However, regardless of their numerous advantages, you must not cavalierly invest in this equity mutual fund.
Are there any tips for investing in ELSS?
Apart from determining the required mutual fund investment amount by using a mutual fund calculator, there are several other factors you need to remember. Listed below are a few ELSS investment tips:
- Stay invested:
ELSS is a tax-saving mutual fund that has a lock-in period of three years. Meaning, you can’t redeem your investments until it is three years. However, make sure to stay invested after the third year. The 3-year lock-in is just for your tax break. You can consider holding on to the ELSS fund as long as you want. Doing so might help you acquire high returns eventually.
- Look outside 80C benefits:
A common mistake people commit while investing in ELSS is focusing solely on the benefits offered by Section 80C. You may find Section 80C insufficient as you find your income increasing. Therefore, consider looking at ELSS as a wealth-creating investment option. So, don’t restrict yourself to the limits of Section 80C and look at ELSS outside of that.
- Use SIP:
Investing in ELSS through SIP offers two benefits. Firstly, SIP will synchronize your deductions with your monthly credits. Secondly, you can enjoy the added benefit of rupee cost averaging, especially during volatile market conditions. There is another advantage. If you are investing in ELSS through SIP, the lock-in period will begin from the month the investment starts. This gives you a 1-year advantage in making your ELSS more liquid.
- Avoid adding too many ELSS:
People tend to buy new ELSS from different AMCs to save on taxes. Avoid doing that as it might adversely affect your mutual fund portfolio. Sometimes, people even ignore identifying their risk tolerance for saving on taxes. This results in a mutual fund portfolio dominated by ELSS. If you do not plan these investments carefully, you can end up with multiple ELSS funds, resulting in over-exposure. Therefore, make sure that you are aware of the ELSS fund you are buying annually and create a mutual fund portfolio that’s well-diversified.
- Plan ahead:
ELSS, like all equity funds, are risky. So, you must plan ahead before you begin investing in ELSS. Investing in ELSS should not just be about reducing your tax burden. It also must fit two more conditions. Firstly, it should align with your risk appetite. If you are over 50, don’t just keep adding more ELSS to your mutual fund portfolio. Secondly, ensure that your ELSS fits well into your overall financial plan. If it does not align with your financial plan, you may end up saving on tax, but it may contradict your overall financial plan.
An ELSS fund is a great investment option for wealth creation and for saving on taxes. Follow the investment tips above to make the most of your ELSS investment.
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