Let’s take into consideration the money you make on an everyday basis, it is not very easy to evaluate your financial position from time to time considering, life keeps us busy and we barely get a chance to do that anyways.
We hardly peek our heads out of the heard and look over the horizon in order to see where we are heading. This quality of following everyone is known as dogmatism; dogmatism is a very prominent phenomenon amongst the generation of working class people today and will continue to be a tendency for a very long time.
Just keep on following the line, see where it takes you, where you end up going. It’s just that you will have no control over it. You will do what everyone else does. It is weird, but very much true.
Come what may; do not let your investments suffer. Your investments make the difference in between you having a secured future or you making a mockery of the next couple of hundred generations to come.
Plan your investments right, make sure the investments are a fine balance of the ones that provide you with very good returns and also the ones that help you save on income tax. There are many investment options today that help you not only to save on tax, but also make the right decisions in terms of tax savings and other returns.
You can receive reimbursements and tax related deductions on investments such as EMI on home loans, LIC, life insurance, health insurance and then there is ELSS.
So let’s discuss in detail what is ELSS and how to invest in ELSS?
What is ELSS?
Full form of ELSS is equity linked saving scheme. These investments are mostly driven by tax related saving schemes. But make sure you should receive the best kind of returns and it should not take away your peace of mind. ELSS should not charge expenses that are higher than others and the ELSS provider should be the best. Make sure you plan out your investment in ELSS very carefully and it does not make a mockery of your other investments.
Let’s discuss the steps related to choosing the best Equity related Saving schemes,
Illustrated below in a tabular format
Steps to invest in ELSS
Selection of the tax saving scheme that you believe will suit you
The scheme is based on the returns it offers, for example last year Axis Mutual fund gave an annual return of more than 40%, where as escorts gave a return of barely 15% annually. Considering these figures it is very difficult to predict the best mutual funds, but chances are that most likely the highest forming mutual fund last year will become the highest performing mutual fund this year as well.
Choose between an option of regular mutual funds, or tax saving mutual fund schemes
The ELSS mutual fund has 2 plans mainly, first being regular and the other being tax saving. Regular charges more or a higher expense ratio every year because of the payment to the one who distributes mutual fund.The flip side of which direct plan does not have to pay the distributors at all. The major difference of the plans being, they will have different NAV’s. If compared to each other the one to go for is the direct plan.
Go ahead and open a bank account
Well sadly it is an important step as the dividends will have to be credited somewhere, somewhere being the bank account which will be under your name.
Pick your intermediary
There are a ton of mutual fund distributors or middle men all over the country and even though you are allowed to directly deal with the company, it is very much advised to pick an intermediary who will step in take the burden off your shoulders of managing your mutual funds. The added advantage is that, they do not charge a commission for their services but instead the companies that they deal with, give them their cut when they get in a new client.
Mutual fund distributor
there are a couple of people who take up the profession of being a mutual fund distributor, What a mutual fund distributor does is, he or she invests in your behalf in a fund that they think is suitable and will provide you related benefits. A word of caution though. pick an ELSS that benefits you not the distributor
You can also pick an online distributor instead of the one that you have met in person. It will all in the end come down to the one that gives you the best returns. You may also look up as to how you can invest in ELSS online
Features of Equity Linked Savings Scheme (ELSS)
The equity linked savings scheme is a great investment option for people who are new to the market. ELSS not only provides assured return on investment over a long period of time but also works as a great tax savings instrument. Equity linked savings scheme does not have any age limit, so one can start investing in ELSS the day they start earning. Besides this, there are various other features of ELSS. Let’s take a look at it.
Key Features of Equity Linked Savings Scheme:
- Equity linked savings schemes are open-ended mutual fund scheme which provides tax benefit up to Rs.1,50,000 under section 80C of Income Tax Act.
- Under ELSS the investors have two option of investment i.e. dividend or growth option.
- Under growth option, a lump-sum amount is paid to the investors after the completion of the lock in period. Whereas, in dividend option, during the lock-in period of 3 years a fixed amount is paid in installments to the investors.
- One can invest in ELSS up to maximum limit of Rs.1,50,000 per year.
- As a diversified mutual fund scheme, the maximum amount of money is invested in equity oriented instruments.
- The equity linked savings schemes comes with a lock-in period of 3 years.
- The investors can also opt for Systematic Investment Plan to make investment in ELSS. With the help of SIP, one can make a disciplined investment in mutual funds and gain long term returns on investment.
- The return on investment made in ELSS total depends on the performance of the market.
Advantages of ELSS
ELSS offer tax free gains, very high liquidity and very low charges everything about ELSS is transparency. It may come with a lock in period of barely 3 years, post which one can withdraw or displace the amount according to their wish. You can calculate the exact amount of investment with ELSS investment calculator.
What are the advantages of ELSS?
ELSS not only works as a great investment option to create a financial cushion in a long run, but it also has more advantages. Let’s take a look at the benefits of investing in equity linked savings schemes.
Provides 3- Year Lock in Period-
As compared to National Savings Certificate (NSC) and Public Provident Fund (PPF) which has a lock-in period of 6 years and 15 years, the ELSS provides very short lock in period of 3 years. Thus, the individuals who want to make a short term investment can also invest in ELSS. Moreover, the lock-in period of ELSS is also lower than the other mutual fund options.
The amount invested in equity linked savings schemes up to Rs.1, 50,000 is applicable for tax benefit under section 80C of Income Tax Act 1961. Besides this, ELSS also provides add-on benefit to the investors as regards to capital growth.
Potential to Provide High Returns-
In ELSS the majority of the amount is invested in equity oriented instruments so potentially one can gain high return on investment if the market performs well. If the investors have a good portfolio then they can earn maximum return on investment in case the economy rises.
Provides the option of Dividend and Growth-
ELSS provides two fund options to invest in, growth fund and dividend fund. In growth fund option a lump-sum amount is paid to the investors after the completion of the lock in period. On the other hand, in dividend option, a fixed amount is paid in installments, to the investors during the lock-in period of 3 years.
No Minimum Limit-
The minimum limit of investing in ELSS is as low as Rs.500. So, even young individuals who have low income can also consider investing in ELSS.
What are the Disadvantages of Investing in ELSS?
As compared to the advantages, there are also certain disadvantages of investing on ELSS. These are as following:
- ELSS requires a lot of documentation while making an investment.
- As this is an equity based investment, the returns totally depend of the market performance. So, if the market is down then the return of investment is also low.
- Equity linked savings schemes does not allow premature withdrawal.
- NRIs are not allowed to make investment in most of the mutual fund schemes.
As compared to NSC and PPF investment in ELSS includes higher risk.
Where to open an ELSS account
There are many nationalized and private banks that give you the option of opening an ELSS account. Make sure inform your banker, that’s what you wish to do. You can also look up how to open ELSS account in SBI, on the internet in order to find out ways of opening an account. You may if you wish to invest annually or Bi-annually.
Even quarterly is an option but distributors always suggest that you should start a SIP. This will make all the difference and you will eventually be able to understand that SIP has more benefits as compared to any other kind of investments.
When it comes to banks there are many banks who give you the option of ELSS, some of the top contenders being SBI and Union bank of India in terms of nationalized bank where as axis and HDFC are the private banks that ring in the most number of investors every year. Also keep in mind to look it up online how to invest in ELSS HDFC or how to invest in ELSS axis. To search about SIP you can have a look at how to invest in ELSS through sip and ELSS investment procedure.
Investment related options are many and ELSS is one of the better options in the market. The short lock in period and as it being an equity related scheme the potential for high returns makes it a very attractive option amongst investors.
You can opt for the dividend option and receive returns during the lock in period. Also one can opt for SIP in this plan which is a boon for salaried and first time investors. You can have a discussion with one of our representatives and they will explain the details of investing in ELSS. You can also look out for ELSS investment plan on the internet and find out more about it.
The only major disadvantage of ELSS is the fact that the risk involved is very high which makes for a something of a gamble. In the event that the company shuts down there are no chances that you will receive even your principal amount. That aside even while you stay invested it entirely depends on the market conditions to give you your returns.
To avoid any risky investments, chances are that an advisor can give you a detailed and safe suggestion of going about investing in the right kind of fund. Also past records of the fund are key determining factors of its future performance. So pick a fund that has performed well in the past in order to give you better performance in the future as well.
That aside make sure once your investment is done, you should consult with your distributor or middle man to understand the performance of the existing investments and future predictions as well.
Knowledge is the key to success here and you must gain knowledge in relation to these funds, time and again. You must keep yourself updated in order to avoid any kind of surprises. It is said that the common notion with regards to investments are shorter the duration, higher are the chances of loss and profits, but the longer you stay invested more are the chances of you making a more steady and stable return.
So let your investment complete an entire financial cycle which will help you understand the highs and lows of the market. So stay invested for as long as you can. Also try not to put all your eggs in the same basket. As in branch out your investments to as many options as you can which will help you stay afloat in case your other investments happen to sink. You will make money even when the market conditions are bad.
Over and all, do connect with us to understand investments and the most profitable returns that you can get. We at Policy Bazaar have a team of experts who strive to provide the most effective solutions in the market.
Frequently Asked Questions Equity Linked Saving Scheme (ELSS):
1. Is ELSS taxable after 3 years?
Ans- After completion of the lock in period the returns from ELSS fund are applicable for tax exemption up to the limit if Rs.1,50,000 under section 80C of Income Tax Act 1961.
2. Does ELSS come under 80c?
Ans- Yes, the tax benefit offered by ELSS Scheme comes under section 80C of Income Tax Act.
3. Is it good to invest in ELSS?
Ans-ELSS is generally equity mutual funds which has a lock-in period of 3 years. Thus, ELSS includes all the risks related to the investment in equity mutual funds. Investing in equity linked savings schemes can be beneficial if the tenure of investment is 5-10 years. one can consider investing in ELSS based on their risk appetite.
4. Can we withdraw ELSS before 3 years?
Ans- Premature withdrawal of funds before the completion of 3 years of lock-in period is not allowed in ELSS Scheme.
5. Is ELSS safe?
Ans- ELSS is a safe investment option for those individuals who has a proper knowledge of the market and has a higher risk appetite. ELSS funds can be treated as high risk and high reward category. As compared to the direct investing in market funds, ELSS is a safe way of investment. Moreover, in ELSS one can start investment with a minimum of Rs.500.
6. Which is better ELSS or SIP?
Ans- The SIP and ELSS are two different investment instruments. ELSS is a mutual fund scheme in which the money is invested in securities related to equities. On the other hand, SIP is just an investment method where a pre-determined fixed amount is deducted on particular intervals of time. Therefore, an individual can invest in all the mutual fund schemes includes SIP through the process of SIP. Moreover, unlike ELSS the period of investment in SIP totally depends on the type of mutual fund.
7. How do I withdraw from ELSS SIP?
Ans- If the investment made on ELSS is one time then the individual can withdraw any amount partial or full after the completion of the lock-in period of 3 years. But in case, the investment is made through SIP then the monthly installment is locked in for 3 years and one can withdrawal of the respective credit per month.
8. Is ELSS interest tax free?
Ans- Yes, The interest earned on ELSS funds are tax free under section 80C of Income Tax Act 1961.
9. How do I invest in ELSS?
Ans- The Investment Limit in ELSS scheme is lower as compared to NSC and PPF. One can start investing in ELSS with a minimum amount of Rs.500. Moreover, the investors can choose to invest a lump-sum amount in ELSS fund at one go. They can also make investment in ELSS one monthly basis through the process of SIP.
10. Is demat account necessary for ELSS?
Ans-One does not need a demat account to invest in equity linked savings scheme
11. Does ELSS have lock in period?
Ans- Yes, ELSS has a lock in period of years.
12. Is PPF better than ELSS?
Ans- As PPF is a government backed investment instrument, it is much safer as compared to the equity linked saving schemes. However, if we talk about returns than risk then as compared to the ELSS the returns on PPF are comparatively low as it includes lower risk. Moreover, ELSS has a lock-in period of 3 years, whereas, PPF has a lock-in period of 15 years. Therefore, ELSS is a better investment option for those individuals who has a high risk appetite and want to invest for tenure of 5-10 years.
13. What is the difference between mutual fund and ELSS?
The Main difference between ELSS and mutual fund is that in ELSS the money is majorly invested in equities. Moreover, ELSS funds have a lock in period of 3 years. On contrary to this, ELSS is a type of mutual fund scheme and as compared to ELSS the other mutual fund scheme does not have any lock-in period. Thus, in mutual fund the money is invested by the asset management company in various investment instruments like equities, stocks, debt, etc. in order to provide high return of investment to the investors.