There are many popular tax saving options such as an equity-linked saving scheme for beginners. The good news is that according to section 80C of the Income Tax Act, you can get a tax deduction. The ELSS tax benefits are valid when your investment in such a scheme is below 1.5 lacs. ELSS tax benefits are also presumed to be better because they come with the shortest lock-in period of 3 years. This would mean, you have an option to sell your systematic investment plan (SIP) in just 3 years from the date of investment.
Let us understand what considerations you must make before you put your money into ELSS Mutual Fund Investment.
- Do a comparative analysis of the fund you are planning to invest in. A comparative analysis will include the performance of the fund, its competitors, and benchmarks. If you find it outperforming these parameters, such a fund can fetch you high returns.
- Expense Ratio: If the management of your funds is too expensive, it would mean a higher expense ratio. Considering a mutual fund investment with lower expense ratio will give you more funds in return.
- There are also certain financial parameters such as Standard Deviation, certain ratios and values to conduct the appropriate analysis of the fund. For example, to find out which fund is riskier, you can look for a higher standard deviation and beta. Although, funds with a higher Sharpe ratio will be a better choice.
- You should also make sure that your fund manager is competent enough and knows their work. For creating the right portfolio that would suit risk appetite, it is important that he/ she must be experienced and analytical. This will help you in choosing the right stocks at the right time.
There are options like growth, dividend and dividend reinvestments options to invest ELSS. Under the growth option, your net asset value will multiply substantially while you get no dividends. In the dividends option, you get the dividends whenever there’s a declaration of excessive profits. Lastly, as the name suggests, the dividend gets added into your NAV in dividend reinvestments option.
Advantages of ELSS Funds
Equity-linked savings scheme is a good option to begin your investments with, because of a number of advantages that include a short lock-in period. You can have your money saved and multiplied in medium-term with relatively higher liquidity than other investment options like term deposits.
The lower tax rates are an added perk with the ELSS mutual funds. There is no long term capital gains tax up to ₹1 lac while over that limit; the rate is as low as 10%. Therefore, pay lower taxes and aim at getting higher returns with your ELSS fund.
Another advantage of choosing an ELSS fund will certainly fetch you higher returns than fixed deposits. With a medium or less risk investment and such high returns, what else would you desire!?