The tax-saving season has begun and many taxpayers could be searching for the tax saving mutual fund schemes. The mutual fund schemes that come with tax benefits under section 80C of the Income Tax Act are called Equity-Linked Savings Scheme (ELSS). Investment in ELSS is predominantly in equities and comes with a lock-in period of 3 years. As the maximum amount of investment under section 80C is capped at Rs 1.5 lakh per financial year, the maximum that one may invest in ELSS for tax benefit is also up to Rs 1.5 lakh.
By investing Rs 1 lakh in ELSS, someone in the highest tax slab can save Rs 31,200 of tax, including cess. And, if the investment is Rs 1.5 lakh, the maximum tax saving under section 80C can be Rs 46,800.
If you are looking for the best ELSS funds to invest in 2020, here are 5 things you should not ignore before investing in ELSS.
1. ELSS past performance returns
Do not merely go by the past performance of the scheme especially over a short period of 1 or 2 years. The ELSS returns generated in the past may not get replicated in future. The top ELSS schemes may not remain on top after 3 or 5 years. Go with ELSS schemes that have consistently performed over benchmark and peers over a longer period.
2. ELSS Ratings
Choosing to go with highly rated funds especially 5-star funds may not always be the right approach. Although, high Ratings provide a bit of comfort, do not rely entirely on them to deliver. The ELSS Ranking/Ratings may change over time depending on the market conditions and changes in the scheme’s portfolio.
To generate better returns from your ELSS investments, it is crucial that you diversify across 2-3 funds. Not all ELSS funds are the same in terms of market capitalisation and sector allocation. And, it’s difficult to predict which sector or stocks will perform over the next 3-5 years. Therefore, choose better performing funds with varying allocation across industries and capitalisation.
4. ELSS locking period
Although the lock-in period in ELSS is for 3 years, it is not necessary that the investor should withdraw after the end of the lock-in period. After lock-in ends, the investment in ELSS is similar to open-ended fund and one can make a partial withdrawal of units or redeem fully anytime.
5. ELSS SIP or lump sum
It’s better to invest a lump sum in ELSS as against making SIP investments. If you choose to go the SIP route, better to start in April. Remember, each installment of SIP will have a lock-in period of 36 months.
Finally, there is nothing called the best ELSS funds as the return is a function of different factors including fund’s portfolio, expense ratio etc. Ideally, link your ELSS to a long term goal and let the funds grow. As equities have the potential to generate high inflation-adjusted returns over the long term, continuing also helps if the returns after 3 years are low.