Consider these 5 things before making ELSS investment

Equity-linked saving scheme (ELSS) is a type of mutual funds which has been successful in encouraging long-term investment discipline amongst investors. By providing good returns over a long term,  many ELSS schemes have outperformed the stock market in the past five years.

The awareness about ELSS and the flexibility of this product seem to have attracted a lot of young, first-time investors. These investors are flocking to invest in ELSS these days. If you are one of them, it is essential that you have sufficient knowledge before you make your investment decision.

Given below are some important factors you should consider before investing in ELSS funds.

1. Know How Much Can You Invest!

For ELSS schemes, you can begin your investment with just Rs 500, which is the minimum investment amount and there are no upper limits on your investment. However, remember that under Section 80C of Income Tax Act 1961, the maximum tax benefit that you can avail from ELSS investments is Rs. 1,50,000.Here is the comparison of ELSS scheme with other saving investment option like PPF.

2. What are the Tax Exemptions?

Investment in ELSS funds falls under the exempt category (EEE-exempt-exempt-exempt). For ELSS investment, you can avail tax benefits under section 80C of the Income Tax Act. So, you do not require to pay tax on the investment amount. In addition, the dividends received from ELSS investments are totally tax-free.

Since the holding period is more than one year, it falls under long-term capital gains tax. Hence, capital gains arising out of these ELSS investments are entirely tax-free.

3. Is There Any Lock-In Period?

All savings instruments that fall under section 80C, like- PPF, EPF, NSC have lock-in periods. However, compared to the other investments, ELSS has the shortest lock-in period which is 3 years.

However, if you are investing through Systematic Investment Plan (SIP), each SIP investment will be treated as a separate investment, and each is locked-in for next three years.

4. Which Option is better for You? Growth or Dividend?

You can invest in any of the three options in ELSS:

• Growth

In this option, your investment goes on increasing cumulatively until the time you redeem your funds. This is the best option for you if you are young and are investing in ELSS considering the long-term avenue for your financial goals.

• Dividend Payout

In this option, you receive dividends from your investments which again are tax-free. This option can be useful if you are nearing your retirement and feel that some regular payouts may help you with your finances.

• Dividend Reinvestment

Here, each set of reinvested units get locked-in for further three years and hence it’s not an ideal option as you can hardly get out of the funds fully.

In a nutshell, out of the three, growth option always scores over dividend payout & dividend reinvestment option as it keeps your gains invested for long-term wealth creation. But still, if you want to choose the dividend option, go for dividend payout rather than dividend reinvestment because it is more flexible.

Note: Under dividend reinvestment option, the amount of dividend reinvested is considered as afresh investment, and hence it getstax-benefit as well as getsblocked for another 3 years (increase in effective lock-in-period).

5. Know the Risk Factor!

ELSS investment comprises of diversified equity funds, and hence the funds are invested in equity or equity-related investments that carry market risk. If you are an extremely risk-averse investor, then ELSS is not the right product for you.

However, if you are ready to take a little risk, this is the best option for tax saving as well as achieving your long-term financial objectives. Also, it also helps you in wealth creation.

Conclusion:

In addition to the above factors, you must consider other factors like fund size, fund rating, transaction cost, past trends while coming to a final decision. While comparing funds look for consistent performer rather than a current performer and consider your risk appetite before investing.

Remember that ELSS has become a popular tax saving investment option and if you are willing to take a little bit risky, then it is the best tax saving option for you.