What is ELSS?
Equity Linked Saving Schemes (ELSS) is tax saving mutual fund schemes. It is a diversified equity fund that invests in different stocks form different sectors. Minimum 65% exposure to equities, some of the ELSS goes as high as 80% to 85%.
Advantages of ELSS:
- Avail tax deduction under Section 80C.
- Dividends are tax free.
- Gain from ELSS redemption is tax free. Have to remember it has 3 years lock-in period.
- Suitable for Long term Goal.
- Advantage over PPF regarding the 15 years lock-in period and also the returns.
- Advantage over other tax saving instrument such as Bank FD, NSC, Post office TD schemes, where returns are taxable based on individual tax slab.
As ELSS has both Tax saving and Equity market investment benefits, does it mean everyone should invest in ELSS?
ELSS has equity exposure, which means it carries market risk. Hence if we need an instrument which should help us to save tax and help us to achieve our long term goal (minimum 5 years), we can choose ELSSS. Since for long term goals it is suggested to invest in equity market. So based on your time horizon for your goal you should choose ELSS. Tax saving should not be the only reason to invest in ELSS.
How to choose ELSS mutual fund scheme?
Please check the checklist while investing in Mutual Fund article.
Should we invest lump sum or SIP (Systematic Investment Plan)?
Lump sum means we are investing a certain amount of money in one shot; we will get number of units based on the NAV of that point of time. Since time to market is just impossible, it is better to choose SIP route. While choosing SIP route, we have to understand that periodic investment through SIP should complete 3 years locking period before redeem. We can choose SWP (Systematic Withdraw Plan), choose a certain amount or certain units, which can be systematically, withdraw after 3 years.
Direct or Regular investment for ELSS?
In Direct investment route, mutual fund houses does not have to pay any commission to the distributor and has better returns compare to Regular investment. For more information please check here.