Before You Invest, Here Are 5 Things To Know About ELSS Mutual Funds
Make sure the money you commit to your ELSS Mutual Funds are not going to be needed in the next three years
With their 5-year annualised returns clocking the 20% mark for most top rated ELSS (Equity Linked Savings Scheme) Mutual Funds, they are fast emerging as a top pick for investors looking to make a last-minute dash to save taxes under Section 80C. ELSS Mutual Funds have been accorded the "EEE" status, meaning that investment made into them are tax deductible, dividends are tax free, and capital gains at the time of redemption are tax exempt as well. If you're considering investing into an ELSS, here are five important things to keep in mind.
They are high risk
Don't be fooled by the rosy picture painted by the 3-year and 5-year return figures posted by most ELSS funds - they are, and always will be, high risk in nature. ELSS Funds invest nearly 100% of their portfolios into equity shares at all times, and can therefore take quite a drubbing if markets head south. Case in point - most ELSS Fund NAV's tanked 50%-60% during the carnage of 2008.
A dividend option is available
If generating interim liquidity is something you look forward to from your tax saving investments, make sure you choose the dividend and not the growth option while signing up. Traditionally, ELSS Mutual Funds have been known to declare a dividend once a year (sometimes, twice). The quantum of the dividend is linked to market returns, and may loosely range from 5% to 25% of your fund value.
Each SIP tranche is counted as a unique purchase
If you've decided to make the smart move of dividing up your ELSS purchases through the year via the SIP (Systematic Investment Plan) route, do bear in mind that each SIP tranche will count as a unique purchase, and will be locked in for three years from the SIP debit date. This means that the lock-in period for your entire outlay will finish in four years, not three.
No interim withdrawals are allowed
ELSS Mutual Funds enforce a hard lock-in on your money. What this means is that there are no extenuating circumstances under which you'll be allowed to pull out your money, even at the cost of rolling back your tax savings. Make sure the money you commit to your ELSS Mutual Funds are not going to be needed in the next three years.
ELSS investments should not be made with a 3-year view
Many investors confuse the mandated 3-year lock in period associated with ELSS Mutual Funds, with the ideal time horizon for making an investment into them. In reality, the ideal time horizon for investing into an ELSS Mutual Fund should be at least three years. Your ELSS investments should be flexible enough that you should be able to extend your investing time horizon on short notice, just in case your stipulated lock in period unluckily ends amidst the throes of a bear market, and you find that your moneys are deep in the red!