BusinessThe Smart Investor's Guide to ELSS Funds

The Smart Investor’s Guide to ELSS Funds

Investing in ELSS funds is a great way to save taxes while building wealth for the future. ELSS stands for Equity Linked Savings Scheme and is a type of mutual fund that provides tax benefits under Section 80C of the Income Tax Act. 

Tips on investing in ELSS Funds

Here are some tips on how to invest in ELSS funds:

Choose the Right Fund

With so many ELSS funds available, it’s important to choose the right one that aligns with your investment objectives and risk appetite. Look at factors like the fund’s historical returns over 3–5-year periods, portfolio composition across market caps and sectors, fund managers’ track record in generating consistent alpha over benchmarks, expenses ratio charged by the fund and minimum investment amount. Leading ELSS funds that have delivered healthy returns include Axis Long Term Equity, Aditya Birla Sun Life Tax Relief 96, Mirae Asset Tax Saver Fund, among others.

Invest for the Long Term

One of the distinct advantages of ELSS funds is the 3-year lock-in period. This ensures investors stay put for at least 3 years and ride out any short-term volatility in equity markets. The lock-in period enforces the discipline required for long term wealth creation. So, invest in ELSS only if you have at least a 3–5-year investment horizon to allow your corpus to grow uninterrupted. The long-term approach also helps counter the inherent volatility of equity markets more efficiently.

Start Early, Invest Regularly

Investors should not wait until the last quarter of the financial year to make a lump sum investment in ELSS. Instead, start investing early so you can take full advantage of compounding over the long term. Invest regularly via SIPs so you average out the ups and downs in stock markets. Even small monthly SIPs of Rs. 500-1000 invested diligently over 5-10 years can grow to a large corpus. Automate your SIPs so you invest consistently every month without having to actively time the markets.

Maximize Tax Benefits

A key benefit of ELSS funds is that they allow tax deductions up to Rs. 1.5 lakh under Section 80C. So, investors must plan sufficiently to exhaust their 80C limit each year and enjoy maximum tax savings. It takes investments of only Rs. 5000-10000 every month across 3-4 ELSS funds to fully utilize the overall limit of Rs. 1.5 lakh. Track your tax planning diligently at the start of each financial year.

Monitor Your Investments Actively

Don’t invest blindly in ELSS and forget about tracking their performance. Keep tabs on the fund’s returns against their respective benchmarks as well as category averages on a quarterly basis. Review your portfolio at least every 6 months to check if any changes are required based on fund performance. Also be aware of any major changes in the fund manager, underlying investment philosophy or size of the assets under management.

Have Realistic Expectations

Since ELSS funds invest predominantly in equities, investors should expect some volatility in returns in the short term. Have reasonable expectations of generates 10-15% CAGR returns over a 5–10-year period. Don’t get unnerved by short term negative returns of even 15-20% and stop your SIPs. Be aware these funds come with medium to high risk so stay invested for the long haul to ride out volatility.

Conclusion

By following these practical tips, retail investors can make the most of investing in ELSS funds as part of their overall portfolio. The tax savings coupled with potential for long term wealth creation make ELSS a compelling investment option. When selected wisely and monitored actively, ELSS funds can help individuals achieve their twin objectives of tax planning and retirement planning efficiently. User-friendly investing platforms like 5paisa offer an easy way to invest in mutual funds and ELSS Funds online.

 

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