Things to Know Before Investing in ELSS Funds

2. Lock-in Period

Most investments offering tax benefits under Section 80C of the Income Tax Act, 1961, have a mandatory lock-in period. ELSS funds have a lock-in period of three years which is the lowest compared to other investments under the section.

Hence, you cannot redeem the units of ELSS funds before the completion of three years. This helps in generating compounded returns. To offer perspective, other investments under Section 80C like PPF has a lock-in of 15 years and NSC has a lock-in of five years.

Hence, ELSS funds with the least lock-in and potential to generate market-linked returns make them worthy of consideration for inclusion in your tax-saving investment portfolio.

3. Invest in ELSS Funds Through SIP

A Systematic Investment Plan or SIP is a way to invest small amounts in mutual funds regularly. It allows you to benefit from Rupee Cost Averaging to bring down the average cost of purchase of the mutual fund units. While SIPs are generally considered to be a good way to start investing, it is particularly beneficial when the markets are falling.

In a SIP, you invest a fixed amount at regular intervals and buy units at the prevalent NAV. So, if the markets are falling, you purchase more units progressively bringing the average cost of purchase down. This removes the risk of investing in a lump sum when the markets are at their peak.

In an ELSS fund, the lock-in period is applicable to every purchase. Hence, if you have opted for a SIP with a monthly frequency, then the investment made every month has a lock-in of three years starting from that month.

Here is an example to help you understand:

• Installment #1: Rs,5000 on January 01, 2021
• Installment #2: Rs.5000 on February 01, 2021
• Installment #3: Rs.5000 on March 01, 2021…and so on.

The lock-in period for the above-mentioned installments will be as follows:

• Installment #1: Lock-in up to January 01, 2024
• Installment #2: Lock-in up to February 01, 2024
• Installment #3: Lock-in up to March 01, 2024

4. Avoid Adding Too Many ELSS Funds To Your Portfolio 

Should you invest in one ELSS fund or more?

How many should you ideally buy?

When it comes to tax-saving investments, most people only focus on saving tax and ignore the impact on their investment portfolio. Hence, they buy units from a new scheme from a different AMC every year.

Some investors don’t even care about the risk level or other aspects of the scheme since they are only concerned with saving tax. As a result, after a few years, they have multiple ELSS schemes in their portfolio. If these investments are not planned carefully, then you can end up with multiple ELSS funds within one category, creating over-exposure.

Hence, investors must ensure that they are aware of the type of ELSS funds they are buying every year and create a diversified portfolio. 

5. Risk level

Since ELSS funds primarily invest in equity and equity-related instruments, the risks are similar to those associated with investing in stocks. However, this does not necessarily mean that all ELSS funds are high-risk schemes.

Fund managers offer ELSS funds with different risk levels to cater to different types of investors. While investing, it is important to remember that high risks are usually associated with high potential returns.

Ensure that you choose investments based on your financial goals and investment plan.

Now that you have decided to invest in ELSS Funds, here is a list of the best ELSS Funds 

Conclusion

ELSS funds are a good option for investors with a long-term investment horizon looking to seek exposure to the stock markets and save taxes.

There are various ELSS funds available. Research your options and ensure that you choose a fund that syncs with your financial plan while helping you reduce your tax liability.