Come January and the annual ritual of submission of tax proofs commences. This is a crucial time for investors who haven’t done their tax savings for the financial year yet and are looking for avenues. However, since they are pressed for time, many investors make the mistake of parking their money in tax saving options that don’t necessarily align with their investor profile.
It is at this time that investors should rather adopt an approach, which aligns their tax saving investments with their long term goals. One such investment option that offers the dual benefits of wealth creation as well as tax saving under Section 80C are ELSS mutual funds. ELSS or Equity Linked Savings Scheme offers several benefits like an opportunity to participate in the stock markets at a low cost, diversification, transparency, flexibility, compounding, better tax adjusted returns as compared to other options and shorter lock in period.In this article, I will shed light on five common myths surrounding ELSS funds and why they aren’t true, to aid your decision making.
The definition of ELSS includes both ‘Equity’ and ‘Savings’. People who have never invested in equities directly or through mutual funds become skeptical with the word ‘equity’. However, ELSS is an efficient investment instrument which is professionally managed by experts in their area.The investments in ELSS can be made either the lump sum mode or Systematic Investment Plan(SIP). In fact, SIP also makes it beneficial as the investments can be spread and rupee cost averaging benefit can be availed of. There are plenty of good online investment platforms that can facilitate investing in ELSS funds within a day’s time, so even if you haven’t saved taxes yet, you can do so with ease. All investments can be made and redeemed easily online after the lock-in period of three year ends. Thus ELSS is one of the most simple products to invest in.
ELSS is part of section 80 C investment options and it has been initiated for greater equity participation by individuals in India. In fact, many investors are introduced to equities through ELSS, when they put some money out of the eligible limit of INR 1.5 lakhs in an endeavor to try something new and other than the traditional debt products. This proves to be beneficial as the returns generated by the small initial investments in ELSS paves the way for larger equity investments in future.Though designed as a tax saving option, ELSS is a complete investment avenue which can be utilized for long term wealth creation.
Most investors invest with the impression that ELSS investment is for three years and it gets automatically redeemed after the lock – in period. This is not true. The lock in period is just a minimum time frame for which the investor needs to stay invested. It can be continued for as long as the investor would want it to be and can be utilized for long term wealth creation like any other equity product. The only difference is that after the three year lock in period, it can be redeemed as and when the investor needs the funds.
ELSS is like any other diversified mutual fund offering ample diversification in a single product. So, investing in a different ELSS every year does not make sense, even from a risk mitigation perspective. These are like other equity mutual funds which invest in different companies and sectors. Here, the Fund Manager has the additional benefit of managing the corpus for three years, without any redemption pressure from the investors. Thus investors should take a consolidated view by looking at the portfolio and performance of a scheme before switching over to a new scheme. This also prevents any fund overlap.
As ELSS is mostly promoted as a section 80 C investment option, most people consider it as a tax saving option with a maximum limit of Rs 1.5 lakh. This is not true and investors can put more money into these schemes as per their need and goals. The only difference is that tax exemption would be available for Rs 1.5 lakh only. However, it is better to look for other equity products as well if you want to invest more corpus to achieve your long term goals.
Investors need to understand that even though the aim is to save taxes, it is their money which is getting invested and there is an opportunity cost associated as well. They should ensure that the investment is a ‘best fit’, before arriving at the decision.
Like any other investment, it is essential for investors to assess their risk tolerance versus the risk associated with a particular investment, their long term goals, liquidity and availability of funds.
Tax saving should be part of an investor’s personal finance goals and objectives. It will, then become a smooth journey which the investor would look forward to. Becoming aware will help in staying ahead.