Wondering what is the best time to start investing money?
Well, the best time to generate wealth through investing is now. But maybe you keep telling yourself that you’ll invest when you make more money, or you’ll just think about it someday. Or, you feel that the market is going up and down at the moment, and you’re looking for a better time to invest. Or perhaps, you don’t consider yourself a finance guru yet to be able to do anything with your money.
Here’s the truth – putting it off can actually lead to losses. By waiting for the best time to invest, you might be missing out on some potential sweet gains. So, the sooner you put your funds to work, the more beneficial it will be for you in the long run.
Now that you’ve got a kick to invest your money, choosing the right investment instrument will be the next thing to do. We’ll make it easier for you.
When it comes to selecting an investment instrument that offers diversification, accessibility and systematic investing, mutual funds are your best bet. And if you are looking for the twin benefit of investment and tax savings, putting your money into equity-linked savings scheme seems just right!
This guide will take you through what is ELSS funds and why you must invest in them. Read on!
Key Takeaways
- ELSS mutual funds are equity funds that help save tax.
- ELSS invests a major corpus in equity or equity.
- Investing money in ELSS helps add the element of diversification to your portfolio.
- Funds invested in equity-linked savings scheme are subject to market risks.
What is ELSS Funds?
Investors are usually on the lookout for instruments that can help them generate wealth, get regular returns and save tax. While there are several investment instruments in the market, most of them are taxed according to income tax rules.
This is where an equity-linked saving scheme comes into the picture.
ELSS mutual funds are equity mutual funds that help you save tax. These funds invest a significant portion of their corpus in equity or equity-related instruments. Another important thing about ELSS funds is that they are called tax saving schemes. This is because they offer tax exemption of up to rupees 1.5 lakhs from your yearly taxable income.
Understand the Good and Bad of ELSS: Advantages and Disadvantages
Now that you know what is ELSS funds, let’s move ahead to the pros and cons of investing in the same.
Advantages of ELSS
Saves Tax
The primary benefit of an equity-linked saving scheme is tax saving. Investing your money in ELSS qualifies for tax deduction under section 80C of income tax. According to this section, an investment of up to INR 1.5 lakhs can be deducted from your taxable income annually.
Diversification
The majority of ELSS funds invest in a diverse group of companies, ranging from small-cap to large-cap. This allows the addition of diversification element to your portfolio.
Systematic Investment Plan
While you have the option to make a lumpsum investment in an equity-linked savings scheme, don’t worry if you cannot!
In case you don’t have funds available, go for a systematic investment plan. It allows you to invest in ELSS funds in small amounts and create wealth.
Disadvantages of ELSS
Market Risks
An equity-linked savings scheme invests primarily in equity and equity-related instruments. For this reason, there are some market risks associated with mutual funds.
Unlike other tax-saving investment instruments, such as PPF and tax saver fixed deposit, there is no guarantee of returns with ELSS. Don’t be disappointed yet! The high-risk return ratio and the lock-in period even out the market fluctuations and work well for long term investors.
No Withdrawals
ELSS funds come with a mandatory lock-in period of three years. This means that if you are in dire need of funds, you cannot withdraw money from ELSS. Looking at the positives, this instils financial discipline.
Did You Know?
According to the Investment Company Institute, there are more than 6000 stock funds available in the U.S.
Want to Invest in ELSS Mutual Funds? Here are a Few Things to Consider
Before you invest in an equity-linked savings scheme, there are a few things you must know about.
ELSS Comes With Moderately High Risk
Equity-linked savings scheme is an equity-oriented scheme and invests 80 per cent into equity and equity-related instruments. This implies that ELSS mutual funds come with moderately high risk as your investment is exposed to market risks. Plus, the funds invested in the equity market are subject to volatility, implying that returns are not guaranteed.
But if you choose to invest your funds for a longer period, there is a chance of getting good returns.
ELSS has a Lock-In Period
When you invest in an equity-linked saving scheme, you cannot withdraw your funds for at least three years. This is because ELSS funds come with a 3 year lock-in period. But don’t forget that ELSS mutual funds are a tax saving instrument with probably the shortest lock-in period.
After completion of the lock-in period, you can hold your funds as long as they’re performing well. You can also withdraw or sell the units post lock-in period.
ELSS Funds Should be Held for a Longer Period
If your ELSS funds are performing well, it is best to stay invested for longer. Historically, ELSS mutual funds perform better when held for a longer time.
ELSS is an Evergreen Investment
The right time to invest in ELSS funds is anytime. ELSS can be a great instrument if you want to save taxes and earn extra income. During the tax season, you can invest in ELSS to reduce the taxable income by 1.5 lakhs.
Top Mistakes to Avoid When Investing in ELSS Mutual Funds
Mutual funds have become a preferred investment avenue for investors. But you must avoid making a few mistakes when putting your money into mutual funds.
Treating Mutual Funds Like Equity Shares
Most novice investors are highly allured by the high short-term returns offered by stocks that they have the same perception for mutual funds. Such investors are not aware or have forgotten that mutual funds are a portfolio of stocks built after in-depth research.
While a stock can be overvalued and undervalued, you cannot apply that analogy to mutual funds. This is because a fund manager selects valued stocks as per the portfolio’s objective. So, avoid buying and selling mutual funds for the purpose of trading.
Looking at Past Performance
A mutual fund’s past performance can give us a good notion of how effective the fund manager was at picking the appropriate stocks at the right time. That was, however, in the past. There is no guarantee that the fund’s past performance will be repeated in the future.
Comparing Funds
While comparing fund performance, most investors make the mistake of weighing apples to oranges. They only focus on the amount of return a fund has provided rather than whether the funds are in the same category or other aspects of the funds. Make sure to do comparisons with appropriate peers and benchmarks.
A small-cap fund’s performance cannot be compared to that of a large-cap fund because the two invest in different types of stocks.
Word to Remember
Equity Market
An equity market is where companies’ shares are issued and traded, either on exchanges or over-the-counter.
Conclusion
ELSS is a two-in-one investment vehicle. It helps you save money on taxes and also helps you build significant wealth with that money.
As a result, you can put these assets towards long-term goals like your child’s education and retirement, where you’ll need to outperform inflation by a large margin.
FAQs
Long-Term Capital Gains on ELSS mutual funds are tax-free up to rupees 1 lakh. Plus, the dividends are tax-free in investors’ hands. Even after the three-year lock-in period has ended, you can continue to invest in this scheme.
You can make good returns with ELSS mutual funds, but you can also make low to negative returns. So, don’t invest in an ELSS if your time horizon is less than three years. Make a long-term investment.
ELSS funds are a terrific way to invest in the stock market while saving money on taxes. Because ELSS funds are equity funds, they may appear to lose money in the near term, so you shouldn’t choose one only for tax benefits.
Can I invest in ELSS mutual funds without opening a demat account?
As an investor, you don’t need a demat account to invest in a mutual fund.
Mutual funds, including equity-linked savings schemes (ELSS), can be purchased through an AMFI-certified mutual fund advisor or directly through the website of a fund house.
A person must be KYC compliant in order to invest in an equity-linked saving scheme. The investment can be made by bringing a duly filled physical form and a check to the fund house’s branch office or the registrar’s office.
