How to invest in ELSS?

Looking for investment options that help you save tax? Read the article on ELSS

ELSS stands for Equity Linked Savings Scheme. It is a type of mutual fund which is eligible for tax benefits under Section 80 C. One can avail tax rebate by investing in ELSS up to 1,50,000 in a financial year. This type of mutual fund is equity-oriented and mostly invests up to 65% of their portfolio into equities and 35% into different fixed securities and different assets, which is different for different funds. So, two targets are achieved at the same time, the first one is tax exemption & the second one is wealth creation.

Features of ELSS

· If you invest in ELSS then there is a Compulsory Lock-in of 3 years, no provisions for the premature exit.
· There are two modes of investments, Systematic Investment Plan (SIP) & Lump Sum.
· One can invest in ELSS, with as low as 500 per month in the form of SIP.
· Three options are available, one is dividend payout, growth option and reinvesting dividend.
· Capital Appreciation + Tax Exemption
· Investing in ELSS is one of the tax saving options which can deliver inflation-beating returns.

How to invest in ELSS

One who wants to invest in ELSS must be KYC compliant. The investment can be done online on fund house’s websites or their aggregators. One other option is to fill up the physical form and the cheque should be submitted at the fund house’s office.

Here we will go through some steps which will help you to know how to invest in ELSS online/offline.

Step 1: Selection of the scheme. It is a must to invest in an ELSS Fund. Check previous returns, and evaluate the performance
Step 2: Open a bank account
Step 3: Pick your intermediary or distributor

The intermediary is the one who works as a middle man between investors & mutual funds. They help the investors in investing in different ELSS Funds. There are various online intermediaries as well where one can invest. The distributor is the one who invests in ELSS funds on behalf of you and provides you the returns he attained through your investments. One can directly connect with the mutual fund and invest in ELSS.

Step 4: Fill up the form which the company asks for and start investing. Even if you are investing in ELSS online, the process would be the same.

There are three options provided to the person who wants to invest in ELSS.

a. Growth Option: This method helps to make compounding work and can deliver higher returns in comparison to other options available.
b. Dividend Option: At a certain interval of time, a dividend is declared and is credited to the investor’s bank account, but in this option, there will not be major capital growth because the amount which we got as a dividend is not invested again.
c. Dividend Reinvestment option: Whenever a dividend is declared we can reinvest it in the same fund. One of the drawbacks of this investment option is, the reinvested dividend amount will have a lock-in period of 3 years from the date of reinvesting not from the date of investment of capital.

There are two modes of investment in ELSS

a. SIP: One can invest in ELSS through SIP. This mode of investment is for those who can’t keep track of the market movements and news regularly. This will be helpful to them because it will help to average out buying price. One can avail higher returns on redemption when the market is in a bull phase.
One of the drawbacks of this mode of investment in ELSS is that you can’t get your whole amount at the end of 3 years. Each transaction which you made to invest in ELSS through SIP is considered as an individual investment. This is based on the concept of first in first out.

b. Lumpsum: This type of investment is for those who know the right time to invest in stocks. This type of investment has a high risk-reward ratio in comparison to SIP. ELSS is market-linked and its value keeps on changing. With the amount you invested in ELSS, several units are bought at the NAV of the day. NAV stands for Net Asset Value. It is the market value assigned to each ELSS fund for the securities held by the particular fund.

Taxation on ELSS

Long term Capital Gains Tax (LTCG) is applicable on ELSS investments. The gains which a person earned on his money is taxable at 10% if gains exceed 1 lakh in a financial year. Gains up to 1 lakh in a financial year are totally exempted from the tax.

Type of Investment Lock in period Expected Returns Tax on returns
ELSS 3 years 11-12% LTCG
FD 5 years 5-6% Income tax
NSC 5 years 6-7% Income tax
PPF 15 years 7-8% No
NPS Till retirement 9-10% No

(FD: Fixed Deposit, NSC: National Saving Scheme, PPF: Public Provident Fund, NPS: National Pension Scheme)

PPF & NPS are included in the EEE category of tax. EEE stands for Exempt-Exempt-Exempt. Here we can see one of the major advantages of ELSS in comparison to other tax saving schemes is, less lock in period.
Some of the schemes to invest in ELSS which are available now are

– Axis Long Term Equity fund
– ICICI Prudential Long Term Equity Fund
– Nippon India Tax Saver Fund

Major part of investments in ELSS is based on markets, so one should understand uncertainty linked with it. There are both pros and cons of investing in SIP mode or Lumpsum. ELSS is one of the best tax saving options available in our country. There are many options available to invest in ELSS as well , so choose wisely and invest in it.