Your guide to investing in equity-linked savings schemes
Equity-linked saving schemes (ELSS) are a great way to save tax. As an investor, you can get a tax exemption up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Since long-term capital gains from equity funds are exempt from tax, the returns that you get on your ELSS investment are tax-free. In addition, the lock-in period for ELSS investments is only three years, and you don’t need to commit to multi-year investments. Don’t want to invest a lump-sum amount? No worries! You can invest fixed regular amounts in ELSS funds through a Systematic Investment Plan (SIP). By investing via SIP instead of a lump-sum investment, you get to average out the cost of investment.
Did you know that ELSS funds have become one of the most preferred tax-saving instruments in the past few years? According to reports, ELSS funds have generated 18.69% annualised returns in the past three years.
While you may want to invest in ELSS funds to save tax, you must also ensure that you get the best returns. Therefore, you must plan and organise your ELSS fund investment.
We share with you top guidelines on how to invest in ELSS:
- Take note of your financial target
Before you invest in ELSS funds, you need understand what your financial goals are. So whether you’re investing to plan your retirement, your child’s education or even your first-home purchase, list it all down. Post this, work on a rough estimate of how much finance you’ll require to meet these goals. This estimate will help you determine how much you need to invest in ELSS funds in order to achieve your every goal.
- Choose the right scheme
When you are investing in ELSS funds, you need to make sure that you select the right fund. Feel that a top-performing ELSS fund is the best one? You are mistaken. The truth is there are several factors including volatility, consistency of the fund manager, reputation of the fund management company and assets under management (AUM) that come into play. Did you know that even amongst tax-saving mutual funds, there is high variation? Therefore, it is essential that you do your research on the high variation among the various ELSS funds available in the market. Or you can also consider approaching a financial advisor to help you with investing in ELSS funds.
- Decide between regular and direct plans
When investing in ELSS funds, there are two different plans you can subscribe to—regular and direct. Both these plans have a different net asset value (NAV). The regular plan charges you a higher expense ratio every year since you have to pay the mutual fund distributor. Initiated a few years ago, the direct plan charges a low expense ratio every year since it does not pay the mutual fund distributor. Many people feel it makes better sense to invest in a direct plan because of the lower expense ratio.
- Select the intermediary
Now that you’ve selected your equity-linked savings scheme, its time to invest in it. How do you this? By finding a suitable intermediary. ELSS investments are primarily done through these intermediaries: A mutual fund distributor, an online distributor or direct investment through the mutual fund company. We share the pros and cons of each intermediary:
- Investing in ELSS funds via a mutual fund distributor
You can find mutual fund distributors anywhere and everywhere in India. These distributors take care of the paperwork and invest on your behalf. The best part: They charge commission from the mutual fund company and not from you. However, they don’t sell the direct plan of equity-linked savings scheme since they don’t get commission on it.
- Investing in ELSS funds via an online distributor
You can invest in ELSS funds sold by any of the online share trading companies. This allows you to easily track your ELSS fund investment along with the share investment. However, online distributors don’t sell the direct plan of equity-linked savings scheme. Most also charge extra fees per transaction.
- Doing direct investment in ELSS funds
Mutual fund companies allow you to invest directly in tax-saving mutual funds and give you the option of getting better returns on your mutual fund investment.
To invest in equity-linked savings scheme, simply visit any of branches of Bajaj Finserv, fill in the application form, submit the necessary documents, and specify whether you want to go the lump sum or SIP route. You can also invest in ELSS funds online by applying on the website here.