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Chapter 3.19: How to invest in ELSS?

Summary:

  • Investing in an equity-linked saving scheme (ELSS) is similar to buying other mutual funds.
  • It is important to choose the ELSS that suits you the most.
  • Once you have invested in an ELSS, you should stay invested for longer than the three-year lock-in period.

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How to invest in ELSS

Investing in an equity-linked savings scheme (ELSS) is a simple process. You can do it on your own or contact your broker.

You can buy ELSS the same way you buy other mutual fund products.

(Read more: How to buy and sell mutual funds)

Here is a step-by-step guide.

Step 1: Figure out who will buy the mutual fund for you. There are three choices.

a. Use your demat or trading account to place an order.

b. Ask your broker to buy on your behalf.

c. Buy from the asset management company (AMC) or the bank that sells mutual funds.

It is helpful if you buy the ELSS from a brokerage house like Kotak Securities. First, you will save time by doing less paperwork. Second, the brokerage can give you valuable tips in choosing the fund which suits you the most.

Step 2: Get a demat account. For this you can contact a depository participant (DP). They will provide you an account opening form. Fill this up and submit proof of identity like photographs and photocopies of documents. You will then need to sign an agreement with the DP, following which you will get an account number. All your purchases and investments will be carried out through this account. You can open as many demat accounts as you need.

Step 3: Once the demat account is opened, you can go to the ‘Mutual Funds’ section of your brokerage’s homepage. Log in and click on ‘Place order’. Do call your broker if you need help with this.

Step 4: Select the name of the ELSS. Be careful what you choose as there are several ELSSs available in the market.

Step 5: Specify the amount you wish to invest in the ELSS. Here you have two choices. You can either opt for a systematic investment plan (SIP) specifying how much you would like to invest in a month. Or, you can choose a lump sum investment where you make the investment in one go. (Read more: What is an SIP?)

Step 6: In case of a dividend scheme, select one of the two dividend options—payout or reinvestment. If you select the payout option, the mutual fund’s dividends will get credited to your bank account. The reinvestment option allows the amount to be used to buy extra units of the scheme. In this case, you will not get the dividends credited to your bank account. Select the former if you want a secondary source of income. The reinvestment option helps you increase the size of your holdings and increases returns. (Read more: Ways to buy mutual funds)

Choosing the right ELSS

When you start looking for an ELSS to invest in, you will be met with a plethora of choices. Almost all the 45-odd fund houses have one or more ELSSs in their bouquet.

Choosing a fund that matches your risk profile is the most difficult part. You have to understand the investment pattern that a particular ELSS has adopted. There is a small catch here. Like other mutual fund schemes, ELSS as a category does not specify where it is investing. Their investments could be in large-cap, mid–cap, multi-cap, or even in small caps. But most ELSS schemes adopt a balanced approach that is tuned to market conditions. Here are a few tricks that might help you in choosing the right ELSS.

1. Match your risk profile with the fund’s investment pattern.

2. Do not rely on the performance of the fund alone. It may not work for you.

For example, an ELSS could have an overexposure in mid-caps. This could become risky during a bearish phase in the market. Your risk profile may not stomach such volatility. In that case, you should not opt for that particular scheme even if it may have fared well in the past.

3. Consider the expense ratio before selecting the ELSS. Expense ratio is the annual fee that all mutual funds charge investors. If the expense ratio is high, the returns will take a hit.

4. Restrict the number of ELSS in your portfolio. Moreover, apart from ELSS, you are also likely to have diversified equity funds. There is no point in having more of the same as it may lead to an overlap.

5. For those who have already invested in ELSS, it is worth running a check on the performance of the funds in the portfolio. Once the minimum lock-in period of three years is over and if the fund is not doing too well, it is time to get out of it.

6. ELSS are excellent wealth creators in the long term. If a fund is doing well and even if the minimum lock-in period is over, stay invested in it as long as you can.

(Read more: How to choose a mutual fund scheme?)

Bottom-line

ELSS schemes reduce your tax burden by up to Rs 1,50,000 in a year. From 2018, returns from ELSS will attract a 10% tax if the capital gain is more than Rs 1 lakh. Together with the lowest lock-in period and potential to give highest returns among its peers in the 80C basket, ELSS is the clear favourite among investors. Investing in ELSS is simple. You can set aside as little as Rs 500 every month to begin an SIP to start investing in ELSS.

WHAT NEXT?

We are almost at the end. Before you start investing in mutual funds, there are a few more important points to keep in mind like taxation. This can affect your total financial returns. To know about these factors, Click here

Why Capital gains report?
  • Snapshot of profit/loss
  • Reflects performance of your portfolio
  • Helps compute taxes
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