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All you wanted to know about Mutual fund ELSS

mutual fund_elss

There are so many tax saving investment options; how Mutual fund ELSS Schemes stand out from all other options?

Table of Contents

What is a mutual fund ELSS?

ELSS is Equity Linked Saving Scheme.A Mutual Fund ELSS is similar to diversified equity funds. That means the fund manager can invest in shares of various companies across various industries. The difference is ELSS has got the added tax benefit, something a diversified equity fund does not offer.

Features of Mutual Funds ELSS

  • The Mutual fund ELSS has at least 80% of the total investible corpus invested in equity and equity-related instruments.

  • The Mutual fund ELSS invests in equity in a diversified manner across different market capitalization, sectors. You can diversify across fund houses and investment styles by investing your money in more than one ELSS fund. You can even stop investing in an underperforming fund at any time and start investing in another one.
  • Mutual fund ELSS has a lock-in period of 3 years.
  • Mutual fund ELSS has a tax exemption on the invested amount under section 80c.
  • Income is treated as Long Term Capital Gain and taxed according to the prevailing tax rules.
  • ELSS Mutual funds do not have any entry or exit load.
  • ELSS can provide inflation-beating returns.
  • As ELSS comes under the purview of SEBI, they have to make necessary disclosures. Hence there is a higher level of transparency.
  • ELSS schemes have two types: Growth schemes and dividend schemes.

Why invest in Mutual Funds ELSS?

Diversification: Most ELSS invest across a diverse group of companies ranging from small-cap to large-cap and across various sectors.
Low minimum amount: You can start investing with Rs.500.
SIPs: Many investors prefer the SIP as it allows them to invest small amounts and avail tax benefits, with an opportunity to create wealth.

What are the tax benefits offered by Mutual Funds ELSS?

ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1.5 Lakh. This gives the taxpayers benefits from 10% to 30% based on their current tax slab.

What are the advantages of Mutual Funds ELSS?

1.Returns
The other tax-saving investments like NSC, PPF will give only 6.8% and 7.1% return p.a whereas the Mutual Fund ELSS has got the potential to deliver more than 12% return p.a.

2.Lock-in-period
Also the lock-in period in Mutual Fund ELSS is 3 years and with NSC it is 6 yrs lock-in and with PPF it is 15 years. Among the various tax saving investment option, Mutual fund ELSS has got the least lock-in period.
3.Discipline
As ELSS has a minimum lock-in period of 3 years, it instills discipline among investors.

4. Compounding
As Mutual Fund ELSS funds have a lock-in period, there is a long-term disciplined investment. Hence it helps investors from the power of compounding.
5. Taxation
On redeeming, you receive Long Term Capital Gains. These are not taxable up to Rs.1 lakh in one financial year. Any LTCG gain above this limit is taxed at 10% of the gains exceeding Rs.1 lakh without indexation.

Ulips are also one of the tax saving investment options. But now everyone has realized that Ulips has got heavy front loaded charges. Moreover smart investors want to separate their Insurance from their investments. They no longer see insurance as an investment; they see insurance as a protection plan. So the smart investors go only for pure term insurance and reject ULIPs.
This is how Mutual Fund ELSS stands out of the crowd.
6. Managed by professionals
Investors need not have in-depth knowledge of markets as it is managed by professional fund managers who have experience and work towards maximizing the return on your investment with extensive market research.
7. Flexible
In Mutual Fund ELSS you can invest as per your flexibility by choosing from SIP or lumpsum.

8.Limit
In Mutual Fund ELSS there is no cap or limit on how much you can invest.

Disadvantages of ELSS

1. No guaranteed returns
Any investment in ELSS doesn’t guarantee returns considering it as an equity-based mutual fund that is subject to market conditions.

2. Documentation
There is a lot of documentation required to invest in Mutual fund ELSS. This is a major disadvantage.

3.Withdrawals
Premature withdrawals are not allowed in Mutual fund ELSS which also becomes a major drawback.

How to invest in ELSS funds?

  • Online

You can invest in ELSS funds via online platforms or directly through the websites of Asset Management Companies.

  • Offline

The investor has to fill a form and submit at the nearby branch of the fund house or he can invest through a broker.

Factors to consider before investing in Mutual Fund ELSS

Before deciding to go for Mutual fund ELSS, here are some points to ponder over.
First check your overall portfolio.Does it need more equity exposure? If yes then you can go for ELSS; if no then you can go for PPF or NSC.


Second thing is to keep in mind, the equity investments are for the long term, say 5 years or more. Though the lock-in period in ELSS is 3 years it is better to invest with a time horizon of 5 yrs or more.

Also investors need to keep in mind, Mutual fund SIP is the best form of investing in mutual funds and ELSS is not an exception. So doing an SIP in ELSS is a good strategy to be followed.

The poor performing ELSS has given around 10% annualized return in the last 5 years whereas the best performing ELSS has delivered around 25% annualized return in the last 5 years. So investors need to be careful in choosing the right ELSS scheme. Past performance, risk adjusted return, consistency are a few parameters to be evaluated in selecting the best performing ELSS scheme. Investors also can approach financial advisors for selecting the right scheme.

How to evaluate the best ELSS Mutual Funds?

  • Fund returns

Compare the funds returns with peers to ensure that the fund has been consistent over the years.

  • Fund history

Choose fund houses that have performed consistently over a long period, say 10 years. A fund’s performance is based on the quality of stocks in its portfolio.

  • Expense ratio

This shows how much of your investment goes towards managing the fund. Choose a fund that has a lower expense ratio.

  • Financial parameters

Consider various financial parameters to analyze the performance of a fund.

  • Fund manager

Be careful when selecting the fund manager because he plays a major role in managing your funds. He must be competent and must have experience in picking the right stocks and creating a strong portfolio.

  • Fund rating

ELSS schemes are rated by various rating agencies such as CRISIL based on their performance and risk factors. However, fund ratings are based on past performance and it cannot ensure the fund’s performance in the future as well.

Mutual Fund ELSS investors

There are two groups of ELSS investors.

  • First group

The majority of investors belong to the first group. They will wake up late to these tax-saving investments. For salaried individuals, it is typical that they will be informed by their accounts department somewhere around the end of January to provide proof of tax-saving investment immediately or else extra tax will be deducted from their February salary.

At the neck of the moment, the choice ends up being guided by convenience alone. They tend to think about tax first and investments later. As long as something saves tax, its real benefits and features as an investment are paid less attention to. That means the investments will be chosen more for convenience than for suitability.

  • Second group

There is another group of investors. Though this group is a very small group, it is a very smart group. They will not rush for a tax saving scheme at the last minute. They will plan in advance. That means they will have more time to choose the right product.

They will save tax as well as choose a good investment option. They will also check whether this particular tax-saving scheme will suit their overall portfolio or not; will this tax-saving investment fit into their comprehensive financial plan.

That means they will consciously choose an investment that saves tax as well as helps them in achieving their financial goals like children’s higher education, , buying a house, retirement plans.

So…now just check-up which group you are in.

Are you in the first group or the second?

In order to be in the right group, the pre-requisite is to have a financial plan customized to suit your financial commitments and dreams. If you are really interested in creating a personalized comprehensive financial plan for yourself and your family, I strongly recommend you to take advantage of

 
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