Several investors claim that investing in mutual funds is one of the easiest way to grow their capital. With professional management by fund managers, this statement is absolutely true. One of the best things about mutual funds is the wide variety of investments available under this broad umbrella. One such type of investments is ELSS funds, commonly known as tax-saving mutual funds. There are several things that you as an investor must be aware about before you decide to invest in ELSS tax saving mutual funds. Read on to know these things.

  1. You do not need to invest Rs 1.5 lac per annum in ELSS mutual funds

Let us understand this with the help of an example. Gauri earns Rs 15 lac per annum and is able to save Rs 5 lac this year. Her friends suggest her to invest in mutual funds to achieve higher returns on her investment portfolio. She already contributes Rs 80,000 in several Section 80C investments such as Employee Provident Fund (EPF), Public Provident Fund (PPF), etc. In this case, Gauri might consider invested just Rs 70,000 in ELSS mutual funds as the upper limit for tax deduction under Section 80C is Rs 1.5 lac per annum. (Rs 80,000 + Rs 70,000 = Rs 1.5 lac). She can invest the remaining Rs 4.3 lacs in other mutual funds that serve her investment needs.

  1. What is the ideal time to invest in ELSS funds?
    Just like any other types of mutual funds, ELSS funds are also foreseen to fluctuate throught out any period. Investing in ELSS funds via lumpsum investment may fetch higher returns provided that you enter at the right time. What we mean to say is that ELSS funds may exhibit distressing returns if one enters the market at the wrong time. If you want to avoid that, you can choose to invest in ELSS funds via SIP investments. SIP allow investors to enter the markets at any time due to a concept known as rupee cost averaging.
  2. When will I get back the amount invested in ELSS?
    ELSS funds have a lock-in period of three years. This means that you cannot redeem your ELSS investments before your funds complete a minimum duration of three years. After that, an investor can redeem their ELSS investments any time they deem fit. Redemption in ELSS funds are available on first in first out basis.
  3. How long should an investor stay invested in ELSS funds?

Though ELSS funds have a lock-in duration of just three years, experts recommend staying invested for a longer duration, say ten years or more. This is because equity funds show their maximum potential when invested for a prolonged duration. This is the reason why several experts advise investors to link their ELSS investments with their long-term financial goals. Doing so will ensure that an investor does not leave the markets during times of uncertainty.

Though ELSS funds offer tax-saving advantages to investors, you must not invest in these mutual funds for the sole purpose of tax benefits. Your ELSS investments must align with your investment portfolio, just like the rest of your mutual fund investments. Happy investing!

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