Introduction to ELSS
If you are new to the world of investing and mutual funds in general, you must have heard about a tax saving scheme called ELSS. For those who don’t know, Equity Linked Saving Scheme or ELSS is an open ended tax saving scheme which comes with a mandatory lock in of three years and tax benefit. Did you know that ELSS is the only equity scheme that comes under Section 80C of the Indian Income Tax Act, 1961? Yes, that is true. You can invest a maximum of Rs. 1.5 lakhs per fiscal year and bring down your gross taxable income by investing in ELSS. So if you are someone who seeks capital appreciation through long term equity investment and at the same time, wish to save some tax, you can consider investing in ELSS.
Some basics about investing
But before making any investment decisions, it is better that every investor first figures out the primary reason behind their investment. Basically, what we are talking about is having a defined financial plan and goals. Having a financial goal will not only help an individual understand how much surplus they need to invest in order to achieve that goal. The next thing for an investor to figure out is their risk appetite. It is essential that you understand your risk appetite and invest only within your limits. Knowing your risk appetite shall help you realize how much money you can afford to lose, in case the market crashes. The last thing you want is to lose all your money, and that can only happen if you invest beyond your risk appetite.
An investor, while charting out an investment strategy, should always keep his financial goal in mind and make sure to align it with your risk appetite, age, and investment horizon. This will allow you to choose an investment product which has an investment strategy similar to yours.
More on ELSS
Coming back to ELSS, as per SEBI guidelines, ELSS funds should invest a minimum of 80 per cent in equity and equity related instruments of the total assets. There’s no constraint as to how big or small company stocks an ELSS fund should invest in. These funds invest in company stocks of large, mid and small market capitalizations. This is also the reason why ELSS has the potential to outperform its benchmark if stayed invested for the long run.
How many ELSS funds should I invest in?
An ELSS fund on an average invests in around 80 to 100 company stocks. If you consider this hypothetical situation and invest in four to five ELSS funds, you are indirectly investing in 400 to 500 different company stocks. Although there isn’t a limit as to how man ELSS funds should you invest in, financial advisors recommend to invest in maximum two to three ELSS funds. Because, ELSS comes with a mandatory lock in period of three years. Which means you cannot redeem or withdraw your ELSS units for at least three years. And if you do, there’s a penalty / fees which investors need to pay. It is necessary that you have funds in your portfolio that allow you to liquidate them in your dire need. Also, having too many funds in your portfolio might also make it difficult to manage and keep a track on them.
The bottom line
ELSS funds can be an excellent choice for investors seeking long term capital appreciation with tax benefit. But it is better that you invest only within your boundaries and keep a diversified portfolio. This way, in volatile market conditions, even if one sector collapses other assets are able to balance out the losses. If you wish, you can even buy ELSS online. It can be one of the funds which will not only benefit investors for reducing their taxable income, but also help them in building a decent corpus in the long run.