Equity-Linked Savings Scheme: 4 things to keep in mind while investing in ELSS

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Published: March 5, 2020 10:02 AM

Investors looking for tax benefits and planning to invest for longer periods such as 5-7 years, should opt for these equity schemes.

mutual fund ELSS category, ELSS craze may down after new tax system, budget 2020, best ELSS funds, top return in mutual funds, tax savings mutual funds, tax savings productsTry to pick an ELSS that benefits you not the distributor.

Equity-linked savings scheme (ELSS) is an equity-oriented scheme under the mutual fund, that is specifically designed for tax saving. ELSS comes with a lock-in period of 3 years starting from the date of investment. Investments in this scheme qualify for tax deduction under section 80C and fall under the EEE category. Hence, investors looking for tax benefits and planning to invest for longer periods, such as 5-7 years, should opt for these equity schemes.

It is an open-ended equity mutual fund, wherein you can start investing from as low as Rs 500. It is also known as one of the most productive tax-saving options. With this scheme, investors can invest around 65 per cent of their funds in the equity market, and the rate of interest earned on the investment is directly linked to the market performance.

If you are also planning to invest in ELSS, here are the steps to follow:

Select the right tax saving scheme that will suit you: The ELSS scheme is based on the returns it offers. For instance, while one mutual fund last year gave an annual return of more than 35 per cent, another gave a return of barely 15 per cent annually. Hence, it is very difficult to predict the best funds to invest in. However, experts say there are chances that the highest performing mutual fund last year will become the highest performing fund this year too.

Regular mutual fund or tax saving mutual fund schemes: Th ELSS investment option has mainly 2 plans, regular and tax saving. The regular investment option charges more or has a higher expense ratio every year. The expense ratio is the payment made to the one who distributes mutual funds. The other option is direct plans, with which investors do not have to pay the distributors at all. The major difference is the plans have different NAV’s. According to experts, when compared to each other, investors should go for the direct plan.

Bank account: You need to open a bank account if you already have one, as the dividends need to be credited in a bank account, under your name.

Intermediary: Next, pick your intermediary. There are lots of mutual fund distributors who will help you manage your mutual funds, even though you are allowed to deal directly with the company. The other option is opting for online distribution. Experts say instead of going for an agent/physical distributor, pick an online distributor. With this option, you are likely to save as well as earn more. Try to pick an ELSS that benefits you and not the distributor.

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