As an investor, it is essential for you to invest in the right financial instruments with specific goals. ELSS, or equity linked savings scheme, is one such investment option that can offer you an opportunity to save on taxes, increase your portfolio value, and at the same time, build wealth for your long-term financial goals.
These tax saving mutual funds have shorter lock-in periods compared to other investment options available under Section 80C of the Income Tax Act, so they allow you to build your investment portfolio faster while reducing your tax liability simultaneously. And since they predominantly invest in equities and equity-related instruments, ELSS funds have the potential to provide optimum returns over time.
To make ELSS investments contribute to your goals, the key is to include them in your overall financial plan carefully and strategically. Here’s how to do that –
- Pick multiple funds strategically
Try to diversify your portfolio with ELSS mutual funds as these schemes also invest across market capitalisations or sectors with varying risk levels. So, it’s wise to pick multiple ones that match your risk appetite strategically rather than sticking with one fund only.
Also, besides including some portion in ELSS funds, diversify your mutual fund portfolio with other different stocks/sectors/asset classes to lower your overall risk exposure and spread out any losses more evenly across all investments.
- Start an SIP
If you have a large sum of money that you want to invest all at once or believe that the market is currently undervalued and has potential for growth in the near future – you may go for lump sum investment.
But if you are a salaried individual or simply want a disciplined route with minimum contribution, you can start a systematic investment plan (SIP) and invest in ELSS online regularly, such as monthly or quarterly. This helps you build wealth over time without having to worry about timing the market. With an SIP, you can also benefit from the rupee cost averaging approach – where you get more units during bear market and fewer units during bull market.
- Buy the right ELSS fund
Choose an ELSS fund that can maximise your returns while minimising risk by researching different options and comparing their performance with that of peer funds and benchmarks. Consider factors such as historical returns (at least 5-10 years), fund manager’s track record, expense ratio, portfolio allocation, and risk measures before making your decision.
- Choosing from growth and dividend distributions
When you invest in ELSS funds, you can choose from different options available – growth option, dividend option, and dividend reinvestment option.
- With the growth option, you do not get any dividends but realise gains or losses when redeeming or switching to another scheme.
- Dividend option pays out dividends, but the fund house gets to choose when and if to declare them. Do note that this type of dividend is taxable in the hands of the investor.
- Under the dividend reinvestment option, any declared dividends will automatically be reinvested back into the scheme itself.
Closing thoughts
ELSS investments can be a great way to save on taxes and capitalise on the growth potential of equities. But it should form only a part of your overall financial planning after careful consideration of your investment goals, risk appetite, and financial capability.
Furthermore, you can easily invest in this tax saver mutual fund through digital platforms such as bank websites, mutual fund investment apps, etc. – and with the right advice from experts, your investment can be more worthwhile.
