KNOW ABOUT A NEW WAY TO INVEST- ELSS

By Rituparna Ray

BALLB 4th Year

ELSS FUNDS

An ELSS (equity-linked savings scheme) fund is the only mutual fund eligible for tax deductions given under the provisions of Section 80C of the Income Tax Act, 1961. One may claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds.

ELSS mutual funds’ asset allocation is mostly made towards equity and equity-linked securities such as listed shares. There might also be exposure to fixed-income securities.

FEATURES

• Offers tax deductions of up to Rs 1,50,000 per year under Section 80C of the Income Tax Act, 1861.

• ELSS funds have a lock-in period of three years, no provision to make a premature exit.

• One may invest any amount in ELSS, there is no upper limit.

• ELSS Funds have the potential to offer inflation-beating returns.

• Double benefits of tax deductions and wealth creation.

• The portfolio of an ELSS fund mostly consists of equities, there might also be exposure to fixed-income securities.

WHO SHOULD INVEST?

The minimum amount that one may invest in ELSS is as low as Rs. 500, which enables even young individuals who have low taxable income to invest in ELSS. On the other hand, people who should genuinely consider investing are:

• Salaried Individuals: When one is a salaried employee, a certain amount goes towards Employee Provident Fund (EPF) which is a fixed income product. ELSS is the best option when one might want to balance out risk and return on their investment portfolio. While Unit Linked Insurance Plans (ULIPs) and the National Pension Scheme (NPS) might offer the same, they do have a higher lock-in period and lesser potential of returns. ULIPs have a lock-in period of five years. NPS being more of a retirement solution with partial exposure to equity, locks in the invested money for 60 years. An ELSS fund, on the contrary has the shortest lock-in period.

• First time investors: For a new investor, ELSS is the ideal choice since in addition to tax benefits one is also introduced to equity investing and mutual funds. Equity investments do carry a higher risk, but that is usually over the short term. If the investment is for more than five years, the risk is much lower. Similar to all equity investments, investing through monthly SIPs through the year is the best option. SIP helps one accumulate more units when the market happens to be in red and generate exceptional returns once the markets are favourable.

FACTORS TO CONSIDER

• Fund returns:

One should compare the fund performance with its competitors & benchmark to ascertain if it has shown consistent performance in the past. If a fund outperforms its benchmark or competitors, then the fund can be trusted to deliver high returns.

• History of fund house:

It is wiser to pick fund houses that have performed consistently over a long period, such as for about five to 10 years.

• Expense ratio:

The expense ratio shows how much of the investment goes towards managing the fund. If a fund has a lower expense ratio, it means there is the probability of higher take-home returns.

• Financial parameters:

Several parameters such as Standard Deviation, Sharpe Ratio, Alpha and Beta should be taken into consideration to analyse the performance of a fund. A fund with a higher standard deviation and beta poses more risk than one with a lower deviation and beta.

• Investment horizon:

One needs to have an investment horizon of longer than five years to consider investing in ELSS funds. The equity exposure of ELSS funds requires one to have a longer investment horizon in order to mitigate market volatility.

• Lock-in period:

ELSS mutual funds come with a lock-in period of three years.

MODE OF INVESTMENT

Investing via an SIP is advised if an individual is unwilling to take higher risk. Investing in SIPs gives the opportunity of investing in a fund across business cycles thus resulting in the benefit of purchasing the fund units across market cycles. Over time, the price at which the fund units were bought, get averaged out and turn out to be on the lower side. This is beneficial as when the markets rise, one can realise higher capital gains on redemption. This benefit wouldn’t be there if the investment was done in a lump sum.