As an investor, you know that having the opportunity to increase returns while reducing your tax liability is extremely beneficial. An equity linked savings scheme or ELSS fund offers this dual advantage.
ELSS funds are tax saving mutual funds that invest in equity and equity-related instruments. They come with a three-year lock-in period, which is the shortest among other tax saving investments under 80c of the income tax act. Being equity-oriented schemes, ELSS funds enjoy favourable tax treatment as long term capital gains up to Rs.1 lakh in a financial year are tax exempt. Gains above this limit are taxable at the rate of 10%.
ELSS can be a smart way to invest in mutual funds to save taxes and build wealth simultaneously. But it’s not enough just to invest; you need to know how to get the most out of your investments with ELSS funds. And that includes understanding different strategies that can maximise your returns on ELSS funds and enhance overall financial growth. Here are some of them.
Choose the right ELSS fund as per your risk appetite and investment objective
Each ELSS fund has its own return potential and risk profile, determined by the scheme’s investment objectives and portfolio composition. Factors like historical returns, expense ratio, fund manager’s experience, and assets under management (AUM) all impact a fund’s performance. Compare funds over three- to five-year periods as they give a more complete picture of the fund’s performance.
Also, different ELSS funds have different investment styles, strategies, and underlying portfolios. Some focus on large-cap stocks, while others have a mix of mid-cap and small-cap stocks, which can impact the risk-reward ratio. As such, analyse your risk appetite and investment objectives to choose a suitable ELSS fund accordingly.
Power of SIP in ELSS
Investing in ELSS through a systematic investment plan is one of the cost-effective ways to accelerate the wealth creation process. It allows you to invest regularly in your chosen ELSS scheme. This approach helps you build and manage your portfolio systematically, reducing the chances of making emotional decisions driven by market fluctuations.
When you start anSIP in an ELSS scheme, you get the dual benefit of structured investments and rupee cost averaging, which reduces your average investment cost over time and helps create wealth in the long term.
Growth vs. dividend option
When investing in ELSS mutual funds, you have the flexibility of selecting between growth and dividend options. In the growth option, the profits generated by the fund are reinvested in the portfolio, thereby increasing its net asset value (NAV). The appreciation in the fund’s value is reflected in the NAV, and investors realise these gains when they redeem their investments.
In the dividend option, the profits are distributed as dividends, which might provide you with a periodic income. However, the dividend received from the dividend option in ELSS funds is taxable in the hands of the investor, as per their income tax slab. To maximise your returns, the growth option is generally recommended, as it allows your investments to grow over the long term.
Don’t invest solely for tax-saving purposes and stay invested for the long term
Investors often make the mistake of treating ELSS funds solely as tax-saving instruments. It’s crucial to consider ELSS funds as part of your broader financial plan rather than just an avenue to meet the 80C tax exemption limit. Integrating ELSS into your investment strategy enables you to take advantage of its dual benefits, wealth creation, and tax savings.
Remember that ELSS funds are diversified equity funds having the potential to grow and appreciate in value over time. While equities can be volatile in the short term, staying invested for the long term gives the funds sufficient time to handle market fluctuations and perform well across market cycles.
To maximise your returns on ELSS funds, it is crucial to adopt a thoughtful strategy that combines diligent planning, disciplined investment habits, and expert advice from qualified professionals. By assessing your financial objectives and risk appetite, you can tailor a suitable long-term investment strategy, enabling you to leverage the power of ELSS funds for wealth creation and financial stability