Over the years, ELSS funds have emerged as one of the most tax-efficient investment options in India. The tax benefits along with the lowest lock-in period and wealth creation potential further add to their popularity. While they are excellent avenues, there are a few things you can keep in mind before investing in them, to get the maximum out of your investments. Let’s take a look.
Your investment horizon need not be limited to the lock-in period
One of the reasons contributing to the popularity of ELSS funds is the appeal of lock-in period. ELSS funds have the lowest lock-in amongst other tax-saving avenues like PPF, tax saver FD, etc. A common trend is that many investors redeem their units as the lock-in period ends. It’s important to note that just because the lock-in is less you don’t have to necessarily exit after three years. The lock-in period is only for the purpose of tax break and you can invest in ELSS funds for as long as you want to. In fact the lock-in works in your favour so that you are able to reap maximum investments and stay disciplined. Ultimately ELSS funds are diversified equity funds that rewards long-term steadfast investors, with just an added tax advantage to them, and hence they shouldn’t be treated any differently than how you would treat as an equity investment.
Don’t ignore the SIP route to investing
More often than not, we indulge in last minute tax planning. Putting off tax planning till the fag end of the financial year essentially means you would making lump sum investments in ELSS funds. However, a better option would be to start tax planning as soon as the financial year starts and invest via SIP route. At the last moment, you may not have a lump sum amount available and might altogether lose on saving taxes. SIP also provides you with the benefit of rupee cost averaging. Rupee cost averaging allows you to exploit the market slump by acquiring more units of ELSS funds, at the same investment value and selling the same when the market hits a high, thus reducing the cost per unit and increasing profitability.
Avoid adding too many ELSS funds in your portfolio
The adage, “more the merrier” may not be true when it comes to adding funds to your portfolio. One common investment folly is that investors select a new ELSS fund each year by different AMC to save taxes and then end up having 6-7 funds in their portfolio. This leads to a portfolio over-diversification which may hurt your returns over the long term. Not only that, having too many ELSS funds will also make it difficult for you to track their performance diligently and leave you with no control over your investments. While there is no magic number, ideally you should have around 2 top performing ELSS funds in your kitty. You should then track their performance periodically. Also, instead of investing in multiple ELSS funds, if you have exhausted your exemption limit, you can go for diversified equity funds and multi-cap funds which can potentially fetch you similar returns in the long run. Based on their 3 year and 5 year returns some ELSS mutual funds you can consider investing in could be Axis Long Term Equity, ICICI Prudential Long term equity fund, among others.
On a final note, don’t just limit the value of this fantastic investment option to tax saving. Investing and tax planning can co-exist and ELSS funds can make this happen. Plan your taxes in advance to avoid last minute hassle and do your research well before selecting the right ELSS funds to invest in.
Harsh Jain is Co-Founder and COO of GROWW.