Equity Linked Saving Schemes, also known as ELSS, can provide a practical way to save tax while building wealth through investing in equity markets. ELSS mutual funds tend to be one of the preferable investment options because they provide an opportunity for capital appreciation. At the same time, it offers tax deduction benefits under Section 80C of the Income Tax Act. To invest optimally in these funds, one requires clear knowledge of these funds’ fundamentals, features, and benefits and how to invest. This article provides quick and easy steps to help you understand how you can invest in ELSS mutual funds.
What Are ELSS Mutual Funds?
ELSS mutual funds are tax-saving investment options. These usually invest in equity or equity-related instruments. Investments in ELSS can be eligible for tax deductions up to ₹1.5 lakh under Section 80C. Since these funds invest in equity-related instruments, they may help generate wealth through stock market exposure.
In addition, the minimum lock-in duration for ELSS is three years, which makes them more liquid when compared to other tax-saving options. Such shorter commitment periods can be suitable for investors who want flexibility with tax benefits in their investments.
Steps to Invest in ELSS Mutual Funds
The following is a breakdown of some easy steps that may help you invest in ELSS mutual funds effectively.
Step 1: Complete Your KYC Requirements
You must complete your Know Your Customer (KYC) process for ELSS mutual fund investments. This is a one-time procedure where one has to submit documents for identification and address proof. There are various online platforms available that give the facility to complete KYC.
The other alternative solution to get this procedure done can be the nearest Point of Service (POS) of KYC registration agencies. Banks and mutual fund distributors also facilitate KYC. Once KYC is done, your KYC status remains valid for mutual fund investments.
The required documents generally include the PAN card, Aadhaar, passport, or driving license as proof of identity, along with a passport-sized photograph and bank account details.
Step 2: Decide Your Investment Amount and Mode
Determine how much you want to invest in ELSS mutual funds. This decision should align with your overall financial goals and tax-saving requirements. Remember that the maximum tax deduction available under Section 80C is ₹1.5 lakh per financial year.
You may choose between two investment modes:
- Lump sum: This involves investing a significant amount at once. This approach might work well if you have surplus funds available. It can also be useful when approaching the end of the financial year.
- Systematic Investment Plan (SIP): With SIPs, you can invest a fixed amount at regular intervals. This method tends to allow disciplined investing. It may also help average out the purchase cost over time.
Step 3: Research and Select the Right ELSS Fund
Choosing the right ELSS mutual fund requires thorough research. One may consider the following factors:
- The fund’s historical performance across different market cycles can offer insight into its resilience. You can consider comparing the performance with benchmark indices and peer funds over 3, 5, and 10-year periods.
- Examine the fund’s portfolio composition to understand its investment strategy. You may look at the sectors and stocks it has invested in and consider whether they align with your risk appetite.
- Fund manager experience plays a crucial role in the fund’s performance. Therefore, researching the fund manager’s track record can be helpful in choosing the right ELSS mutual fund to invest in.
Step 4: Select an Investment Platform
You may invest in ELSS mutual funds through various platforms:
- Direct Application with Asset Management Companies (AMCs): Visit the fund house’s website or office to invest directly. This method tends to eliminate distributor commissions.
- Through Banks or Mutual Fund Distributors: Many banks and financial advisors offer mutual fund investment services. However, they might charge a commission.
- Online Investment Platforms and ELSS Apps: Numerous fintechs offer an ELSS app with user-friendly interfaces for mutual fund investments. These platforms often offer tools for fund comparison and portfolio tracking.
Step 5: Complete the Application Process
Whether investing online or offline, you’ll need to fill out an application form. For online investments through the ELSS apps or platforms, the process can be largely paperless. You need to verify your identity using Aadhaar-based eKYC. In addition, you can then complete the payment digitally.
If investing offline, submit the filled-out application form along with a cheque or payment proof to the AMC or distributor.
Step 6: Monitor Your Investment Periodically
While ELSS investments are locked for three years, monitoring their performance periodically is important. Most ELSS apps provide portfolio-tracking features to help you stay updated.
Reviewing performance every six months or annually might help with proper monitoring. You may focus on:
- Fund performance relative to benchmark indices
- Any changes in fund management
- Portfolio composition and strategy changes
- Expense ratio
Conclusion
ELSS mutual funds present a balanced approach to tax planning and wealth creation. Their equity orientation tends to provide growth potential. The three-year lock-in period strikes the right balance between commitment and liquidity. Following a systematic approach to ELSS investments may help experience growth in finances. However, this requires thorough research and periodic monitoring. Selecting an ELSS fund depends on your financial objectives, risk tolerance, and investment horizon. A disciplined approach to ELSS investments, aligned with your overall financial plan, may contribute to your financial well-being.