Mutual funds have turned out to be a major preference for investment over the years. There are various good reasons for people to consider investing in funds, one of the major reasons being the safety of investments and steady growth of the fund. Number of mutual funds offer various schemes that cater to your long term plans. There are funds which only invest in debt instruments like debentures and government bonds and therefore, come with minimized risk and fixed returns. These funds are ideal for cautious investors. For the ones who prefer keeping their investments balanced may go for funds which invest both in equity and in debt. The adventurous and risk-taking investors who aim at making big profits must invest in funds which are equity based.
In this article, we will talk about equity-based funds or Equity Linked Saving Schemes (ELSS), their benefits and what you must know before investing in them.
What is Equity Linked Saving Scheme?
ELSS or Equity Linked Saving Scheme is an equity mutual fund which aims at incurring profits from Investing in equity and helps you make big savings as you benefit from the deductions it offers on Income Tax. These are also known as tax savings mutual fund schemes.
Why Invest in ELSS?
Consider the following points to know why investing in ELSS is one of the options which will fetch you major gains:
- The prime reason to invest in ELSS is the tax saving benefit that it has to offer. According to Section 80C of Income Tax Act, 1961, the maximum benefit that you can avail of investing in these funds go up to Rs. 1.5 Lakhs.
- It encourages investors to make long-term investments as ELSS comes with a minimum lock-in period of 3 years. When it comes to investments, thinking long term does good as the returns received in the long term is higher, and the total amount received by the investor in the long term shall be enough to finance his potential initiatives and expenses incurred in the process. Also, investing long term will provide tax exemptions on the returns earned.
- Never mind the risk involved, there is an increased possibility of earning huge returns as the fund is Equity based.
- These funds inculcate the habit of savings in investors. Even small investors who can afford investing less can start off with this scheme for as low as Rs. Five hundred per month.
- The average rate of returns over a holding period of 3 years stands at 10.51% which is much above the 8% return that other financial institutions offer.
What To Consider before Investing in ELSS?
Before you invest in ELSS, there are certain things that you need to keep in mind which also qualify as the key features of ELSS. The points mentioned below tell you everything you must know before investing:
- ELSS has the shortest lock-in period as compared to other investment funds which provide the benefit of tax savings. ELSS funds have a lock-in period of 3 years. The closest option available is National Savings Certificate (NSC) which has a lock-in period of 5 years but does not provide lucrative returns.
Investing in ELSS for a long duration of time is the best thing to do as the investor gets a lump sum on maturity.
- ELSS funds definitely involve risk and are considered as an investment instrument aimed at meeting short-term goals. The fact here is that the high risk of volatility that the fund involves can be overcome with time because the high rate of returns in the long term will compensate for the short-term loss if any.
- One can avail deductions under Section 80 of Income Tax Act making an investment in ELSS, the maximum amount being Rs. 1.5 Lakhs. For instance, say you have been paying premiums for your life insurance monthly throughout the year and also invested in mediclaim and ELSS, the amount invested may sum up to half or more than half of Rs. 1.5 Lakhs. The rest of it will comprise the amount invested in ELSS.
- Newbies to mutual fund investments are welcome to invest in ELSS. In fact, ELSS is one of the most recommended mutual fund schemes to kick off their investment journey. The investors get the hang of the high risk and volatility of the stock market within the lock-in period of three years. After that, the investor could invest freely on funds which reflect consistency and worry a lot less about market risk.
- Lastly, let your expectations be realistic. Keep in mind that there is no fixed rate of returns and it may vary year to year. Some loss of your investment in the short term is likely, but the profits in the long term will cover for them.
Reliance Tax Saver Fund
Reliance Tax Saver Fund is an open-ended equity scheme which aims at generating capital in the long term from investing in equity related funds. Like all other ELSS, Reliance Tax Saver Fund also comes with a three year lock-in period and tax benefits.
Here are some features of Reliance Tax Saver Fund:
- Endeavors to invest in funds which show consistency over the years. Companies with potential for high growth over the medium term are preferred when it comes to investment.
- Reliance Tax Saver Fund strikes a perfect balance between investing in large cap and mid-cap companies. A chunk of investments is made in high conviction mid-cap companies.
- Mostly invests in sectors which bring in emerging market trends.
The minimum investment that one can make in Reliance Tax Saver Fund is Rs. 500 a month and deposits are accepted in multiples of Rs. 500 after that. This fund is managed by Mr. Ashwani Kumar.
Getting Started with Reliance Tax Saver Fund
Getting started with Reliance Tax Saver Fund is real easy as there are multiple ways to invest and the investor may go for what suits his convenience. One may log into the mobile website and get started online. There is also a mobile application which will smoothly navigate the investor through the whole procedure. There is also SMS facility available for those who require the details offline and prefer to go through it manually. Or one may go up to the bank branch nearest to him and enquire for a physical form for Reliance Tax Saver Fund.
A detailed analysis of the fund's performance will reveal that the returns of Reliance Tax Saver Fund for a period of 10 years approximately equal a whooping rate of 15.4% which is way above the category average of 12.66% and also crosses the benchmark index of 11.83%. Over the past decades, the fund has grown steadily to sweep away all his peers and emerge as one of the most profitable funds to consider investing in. Not only has this, but the portfolio of the fund also made sure it involves lower risk element as compared to its competitors.
However, the fund's severe under-performance at the start of this year reveals that it suffers from high volatility. The aggressive investment that the fund makes in high-caps and mid-caps seems to fall back upon him.
How to Pick the Right ELSS Fund?
Now that you know the needful about ELSS, you must have some slight idea about how you can pick the right fund to provide you with higher returns and keep your investments intact at the same time. Here are some tips that would help you pick the right ELSS fund and benefit the most from it:
- Look out for funds with the best risk-adjusted returns. The returns that a fund offers after adjusting undue risk reveal the true potential of the fund. Do not get misguided checking out the history of returns as it does not offer complete transparency.
- Go for a fund which has performed quite consistently in the past years. Consistency is definitely a factor to check before investing in any fund. You cannot expect a fund to make benchmark profits every year but going for the fund with the most consistency in its performance will surely do good. Analyze the last five years performance of the funds you would like to invest in. Even if none of the funds made the same profit in each 5 years, go for the one which does not deviate much from the returns that it has to offer.
- Better invest in a growth plan than a dividend plan. Many investors prioritize dividend plans as it guarantees the safety of investments and dividends are announced each year. Moreover, there is no 3 year lock-in period if you opt for a dividend option. But experts suggest investing long-term in growth funds which would earn higher returns and credit a lump sum on maturity to the investor.
Investing in 2 to 3 funds at one stance is a better option than investing the entire sum on one fund which might not perform well. Having multiple investments in one time will make sure profits from the other funds cancels out the losses incurred.