ELSS Mutual Fund: Planning to invest in ELSS? Eight key points to know before investing

ELSS is an equity fund that provides high returns and is a tax saver. Under Sec 80C of the Income Tax Act, you can avail of tax rebates for up to Rs 1.5 lakh in a year through your ELSS investment. Moreover, the scheme typically offers inflation-beating and risk-adjusted returns, which are almost at par with other equity schemes. These are some of the features which make ELSS one of the most efficient tax-saving investment options.

If you are thinking of investing in an ELSS fund, here are eight things you should know about the scheme before investing.

1. Lock-in period

Investments in ELSS get locked for three years or 36 months following the purchase of the mutual fund units. You can redeem or sell your units only after this lock-in period ends. For example, you started a SIP of Rs 5000 in April 2020 for three years. The units purchased on April 1, 2020, will remain locked till March 31, 2023. Similarly, the units allowed by the next installment on May 1, 2020, can be sold after April 30, 2023. If you want to redeem all units accumulated during the SIP tenure in one go, you would have to wait till March 1, 2026, as the last installment of the 3-year SIP in ELSS will allot units to you on March 1, 2023.

2. Investment Limit

There is no upper limit to ELSS investments. But in a financial year, investments only up to Rs 1.5 lakh will be eligible for tax rebates under Sec 80C of the Income Tax Act.

3. Systematic investment

Similar to other mutual fund schemes, ELSS allows you to invest systematically. You can start a monthly SIP for an amount suited to your tax-saving needs. You get the benefits of various market conditions, which help average out the cost of your investments in the long term.

4. Lump sum investment

With ELSS, you have the option to invest in a lump sum. For instance, if you want to invest Rs 1.5 lakh in ELSS, you can either invest the entire sum in one go or make monthly investments during the financial year.

5. Top-up option available

If you have started a SIP in ELSS but find the cumulative amount inadequate, you can top up your investment with a one-time lump sum contribution. This flexibility in terms of investment modes is yet another benefit that ELSS offers.

6. Diversification and risk mitigation

Risk mitigation is one of the main objectives of investment diversification. In the case of ELSS funds, like other mutual funds, this is done by professional fund managers who manage your fund to deliver the best possible returns.

7. Taxes on capital gains from ELSS

Though ELSS investments can help you get tax rebates, the capital gains earned on selling ELSS units attract a long-term capital gain (LTCG) tax. All gains over and above Rs 1 lakh attract an LTCG tax of 10 per cent.

For instance, if your ELSS gains are Rs 1.2 lakh, LTCG tax will only be levied on the amount exceeding Rs 1 lakh, which in this case is Rs 20,000. At the rate of 10 per cent, you will be liable for an LTCG tax of Rs 2,000 on your investment.

8. How to select the right ELSS fund

To choose the right ELSS fund, there are some essential factors which you must consider. The fund’s past performance during different market conditions will give you an idea of its likely future performance. Also check the fund’s expense ratio – a higher ratio will lower your final returns. However, it is advisable to pick a fund based on its overall performance.

ELSS is one of the best investments to utilise the tax rebate provisions under the Income Tax Act. Investors with moderate to high-risk profiles may consider investing in ELSS to save taxes while enjoying modest returns.

The author is the CEO of BankBazaar.com. The views expressed here are that of the author.