What are the steps involved before investing in ELSS?
Equity Linked Savings Schemes (ELSS) allow investors to save tax under Section 80C while also participating in equity market returns. But ELSS funds require some due diligence and planning before investing. Here are the key steps to take for best results.
Determine your risk appetite
ELSS invest at least 65% of their corpus in equities, making them prone to market volatility. While past returns have been good, there is no guaranteed performance. Investors should assess their risk tolerance and ability to withstand portfolio fluctuations over the short term. Those with moderate to high risk appetite are best suited for ELSS. Have realistic return expectations – ELSS can generate inflation-beating returns over 5–7-year horizon but not assured returns year-on-year.
Review your asset allocation
Evaluate your overall asset allocation before deciding ELSS investment amount. Being equity funds, ELSS carry higher risk compared to debt, gold or cash assets you may have. Don’t overweight equities via ELSS at the cost of being under-allocated in other assets. Have a balanced allocation across asset classes prior to ELSS investment so your portfolio remains diversified. Limit ELSS exposure to 10-15% of total assets.
Check your investment horizon
The lock-in period for ELSS funds is 3 years. Investors must remain invested for this period and hence, should have a sufficiently long investment horizon. Those investing in ELSS must have a timeline of at least 5 years to allow for equity market cycles. Keeping funds invested for 3 years or more helps ride out interim volatility as well. Don’t invest in ELSS if your timeline is less than 3 years.
Review existing 80C investments
Analyze what other tax-saving investments you make under Section 80C like PPF, NPS, life insurance premium etc. Maximize use of 80C limit by identifying any unused portion. If your PPF, NPS contributions etc. already cover the Rs 1.5 lakh 80C limit, avoid further ELSS investment solely for tax-saving. Invest any surplus selectively in ELSS purely for wealth creation.
Research ELSS funds
Do proper due diligence across ELSS funds from different fund houses. Compare historical returns, expense ratio, portfolio composition etc. Evaluate fund manager experience in picking stocks. Select a fund with consistent long term track record, moderate to high exposure to large caps and lower expense ratio. Avoid funds with significant mid/small cap focus if you are risk averse. Shortlist funds that align with your goals, risk appetite and investment style.
Complete your KYC documentation for mutual fund investments using the e-KYC route. This instant online KYC verification makes starting and managing ELSS investments much easier compared to physical KYC. You can use Aadhar for e-KYC and avoid paperwork. Please ensure your KYC status is valid before investing in any mutual fund.
Link with financial goals
Link the ELSS investment to specific financial goals like retirement, children’s education etc. This helps sustain investment discipline and have a target maturity for redemption. Review goal requirements and increase/decrease ELSS SIP amount periodically. An ELSS investment for 7-10 years can generate good corpus for important life goals.
Track performance periodically
Keep regular tab on your ELSS fund’s performance – check portfolio holdings, returns relative to benchmark, portfolio turnover etc. This helps ensure fund remains aligned with your goals. Revisit your choice after 2-3 years to assess if performance warrants continuing the SIP.
Be invested for the long term
Don’t redeem ELSS investments as soon as the 3-year lock-in ends. Remain invested with a 5–7-year minimum perspective to derive full benefit. Redeem only if any specific goal is approaching or asset allocation changes warrant booking profits.
ELSS require some planning and research before investing. But disciplined investing through SIP, tax efficiency, wealth creation potential and portfolio diversification make them worthwhile. Follow these steps to make ELSS work optimally in achieving your financial goals. Consult a financial advisor if needed on integrating ELSS in your investment portfolio.