Sunday, 15 April 2018

Equity Linked Saving Scheme (ELSS) | Tax Saving Mutual Fund

Equity Linked Saving Scheme (ELSS) | Tax Saving Mutual Fund

What is ELSS (Equity Linked Saving Scheme)?

ELSS is a diversified equity mutual fund where most of the corpus is invested in equity and equity-related products. An investment in ELSS comes with a lock-in period of three years. ELSS tax saving mutual fund offers a simple way to get tax benefits and at the same time gives you an opportunity to gain from the potential of equity markets. They offer the twin benefits of tax deduction and capital appreciation. Since it is an equity fund, returns from am ELSS fund reflect returns from the equity markets. ELSS tax saving mutual fund are open-ended, which means, the investor can subscribe to the fund at any day. NAV (Net Asset Value) of the fund is decided on every business day.

How to Apply for ELSS (Tax Saving Mutual Fund)?

Once you have finalized the ELSS scheme in which you want to invest, you need to complete your KYC (Know Your Customer) verification. After complying with KYC you can approach to Asset Management Companies for subscribing to ELSS. You have to provide a photocopy of PAN Card along with the duly filled subscription form and a cheque leaf of the investment amount. In case of SIP, an additional form should be filled and a date of SIP to be selected from the options provided in the form. If you are already KYC compliant, you can invest online from the comfort of your home/office on the website of the AMC.

Should one invest via a SIP or in one go?

One can invest in ELSS via a lump sum route or a Systematic Investment Plan (SIP). If you have a lump sum amount in hand and you want to invest in equity funds. There is no harm in investing a lump sum amount because compounding over the long term, could work better with a lump sum. If you are a small investor, the SIP is the way to go for you, with ELSS as well as other mutual funds. You can invest as less as Rs. 500 a month on a predetermined date based on a one-time instruction. This helps you save in a disciplined manner without undue strain on your other financial instruction. This way SIP enables you to spread your tax burden throughout the year.

SIP also has the benefit of averaging out the cost of investors, as at a higher NAV the investor gets lesser units and more number of units at a lower price thus averaging out the cost of investors. However, please note that the three years lock-in shall be applicable to each of those SIPs investments individually.

Also read: Benefits of SIP | Advantages of SIP

One should opt for Growth or Dividend option

Similar to other equity funds, ELSS tax saving mutual fund have two options, 'Growth option' or Dividend option' one has to select either of it. In the growth option, investors get the units at the time of buying and have same number of units till the end. The NAV keeps changing according to the performance of the fund and investor will get a lump sum on the expiry of 3 years. On the other hand, in a dividend option, investors get a regular dividend income, whenever a dividend is declared by the fund, even during the lock-in period. Investors who seek long-term wealth creation generally opt for growth option. Investors seeking regular income invest in dividend option.

How to choose ELSS (Tax Saving Mutual Fund)?

1. Check past performance of the fund. Past performance may not be repeated in future but if a fund performing well in past, it is expected that the fund will keep performing well in the future.
2. Select ELSS tax saving mutual fund that has high AUM (Asset Under Management).
3. Mutual Fund management company should be reputed.
4. The fund should not be too volatile.
5. The fund manager should be consistent.

Also read: 7 Things to know before buying ELSS tax saving mutual fund

Risks in ELSS (Tax Saving Mutual Fund)

The risk is one of the most important factors while investing in ELSS (Equity Linked Saving Scheme) mutual funds. ELSS (Equity Linked Saving Scheme) is equity oriented fund and hence carry high risk. Therefore, any investment decision in ELSS tax saving mutual fund needs to be taken only after consulting the Financial Advisor.

Suitability of ELSS (Tax Saving Mutual Fund)

ELSS schemes are suitable for all types of investors who are not risk averse and need to invest in tax saving schemes. One should keep in mind that returns in these schemes fluctuate depending upon the equity markets. In short, the scheme does not guarantee any fixed amount of returns. There is no age to get started in ELSS tax saving mutual fund, it is a good investment option for those who have just started their career. In ELSS, starting early pays well as there is a special advantage with long-term investment - compounding.

You may also like to read: What should be the duration of the SIP?
You may also like to read: How to set your financial life in order?

You may also like to read: How to invest in mutual funds online?
You may also like to read: What is SIP?

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Equity Linked Saving Scheme (ELSS) | Tax Saving Mutual Fund

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