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5 things you should know before investing in an ELSS

Tax-saving season is here. ELSS or tax planning mutual funds are one of the best way to save taxes under Section 80C of the Income Tax Act.

, ET Online|
Updated: Sep 25, 2018, 05.41 PM IST
tax save
It has the shortest lock-in period, but…
Yes, it is true that Equity Linked Savings Schemes (ELSSs) or tax saving/planning mutual funds have the shortest mandatory lock-in period among the investment options available under Section 80C. An ELSS has a lock-in period of three years, whereas a Public Provident Fund (PPF) account is essentially a long-term (15 years) product. Even a National Savings Certificate (NSC) comes with a lock-in period of five years.

However, you shouldn’t treat ELSSs as a short-term investment product. You should invest in it with a long-term investment horizon of at least five to seven years. It is always better to link your ELSS investment with a long-term goal. This will help you to stay invested in it even after the lock-in period. Of course, you should stay invested in the same scheme, provided it is performing well.

It is risky, but…
Many new investors often get scared when they learn that ELSSs invest mostly in stocks and carry a higher risk. However, you can overcome this if you are prepared to stay invested for a long period. Countless studies prove that one can beat volatility and make superior returns from stocks by staying invested for a long period. You should remind yourself that equity has the potential to offer superior returns than other asset classes over a long period.

It can be your first equity investment
Even if you have never invested in equity mutual fund schemes, you should consider investing in ELSSs. Many mutual fund advisors believe that it is the ideal investment to get into the world of equity mutual fund schemes. Since these schemes come with a mandatory lock-in period of three years, investors would get used to the volatility typically associated with the stock market. Once they get a hang of it, many investors start investing in other equity mutual fund schemes.

Maximum tax break is only Rs 1.5 lakh
Investing Rs 1.5 lakh in ELSSs won’t automatically get you the tax break under Section 80C of the Income Tax Act. The Section 80C is an overcrowded section where many investment options qualify for tax deduction. For example, if you have an Employees Provident Fund (EPF) and a life insurance policy, you may be claiming at least half of Rs 1.5 lakh deduction allowed in a financial year. So, do the calculations before finalising your investment amount. Remember, if you invest more than the required amount in ELSSs, you won’t be able to claim extra deduction under Section 80C.

It can give you the maximum returns, but…
ELSSs have the potential to offer superior returns because they invest mostly in stocks. However, be realistic about returns. Yes, it is true that you can hope to get superior returns if you are ready to hold on to your investments for a long period. Do not think that they would repeat the same performance year after year. Have a return expectation of around 10-12 per cent tax-free returns from your equity mutual funds over a long period.

If you are looking to invest in ELSSs to save taxes this year, here are our recommended ELSSs: Best tax saving mutual funds or ELSS to invest in 2017

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