Looking to create long-term wealth while saving on taxes? Equity-Linked Savings Schemes or ELSS funds are one of the best investment options out there.
Equity-Linked Savings Schemes or ELSS funds are one of the best investment options if you’re looking to create long-term wealth while saving on taxes. Under Section 80C, these investments qualify for a tax rebate of up to Rs. 1,50,000. This diversified equity fund is ideal for your long-term financial goals such as planning for your retirement or buying a new home.
ELSS funds have a lock-in period of three years, though we would suggest investing for a longer duration or until you have got enough returns to achieve your goal. Remember that these funds give you higher returns than any other tax-saving schemes out there. Besides, you don’t have to invest a lump-sum amount, you can invest in these funds through a Systematic Investment Plan (SIP).
Additional Reading: ELSS 101: To Invest Or Not To Invest?
How to invest
Understand your financial goals
First and foremost, you need to assess your financial goals. You can start by listing down all your financial goals. These goals can be planning for your retirement, kid’s education, buying a house or a car, etc. Next, you need to make a rough estimate of the amount of money you’ll need to meet each of your goals. Based on the estimate, you’ll need to define the amount of money that you need to invest to achieve each of your goals.
Choosing the right scheme
A crucial part of investing in ELSS funds is selecting the right fund. A person who is well-versed with ELSS investments will know about the high variation among the different ELSS funds available in the market. It is not necessary that a top-performing fund is the best one, there are other factors such as volatility, a consistent fund manager, reputation of the management company and other factors that come into play. You could always approach a financial advisor to help you with your investment.
Let’s take a closer look at some of the common ELSS terms:
- Expense Ratio – While selecting an ELSS fund, you should look at the expense ratio of the fund. This is basically the amount of money that the fund management company charges an investor for managing the fund. This varies from fund to fund. The formula is total expenses incurred by the fund divided by its Assets Under Management (AUM).
- Past Performance – Another important selection criteria is the past performance of the fund. Assessing a fund’s historical performance will give you insight into its probable future performance. A fund that has performed consistently is a good bet.
- Age of the scheme – Since Mutual Funds are subject to market conditions, it is better to opt for the older schemes. A scheme that has a history of 5 to 10 years would have gone through various market phases – bull, bear and stagnant. So, these are generally considered better options than the other schemes.
- Size of the corpus – Yes, bigger is better! Get to know the corpus of the scheme you’re planning to invest in and compare this with the other schemes available in the market. A bigger corpus means the particular scheme is trusted by a lot of other investors.
There are two different avenues for investing in ELSS funds – regular and direct. The regular route comes with a higher expense ratio than the direct one as the investor is expected to pay the fund distributor. Taking the direct route is considered to be a better option to invest because of the lower expense ratio.
Additional Reading: 5 Tips To Select The Best ELSS Product
Intermediary selection – Once you’ve selected your ELSS fund, you’ll have to invest in it. This can be done either via a Mutual Fund distributor, an online distributor or directly through the fund company.
Mutual Fund Distributor
- Easily accessible
- Does all the work for you – paperwork, investments
- Gets their commission from the fund house
Online Distributor
- Easily accessible
- Easy to track the performance of your funds
- Most charge a fee per transaction
- Ease of investing online
Direct Investment
- You’ll need to visit the fund company for investing.
- You can also invest online via the fund company’s website.
Additional Reading: 8 Huge Mistakes To Avoid While Investing In ELSS
ELSS is the way to go if you’re looking to create wealth while saving on taxes. Caution, due diligence, and proper risk assessment are necessary if you want to gain from your ELSS investments.
Here’s a tip for investing in ELSS funds – always invest via SIP instead of a lump-sum investment. This way, you average out the cost of investment. However, note that each of those investments will get locked-in for three years.
Bonus Read: Axis ELSS 101
Do you have a better strategy for investing in ELSS funds? Feel free to comment below!