Following are some tips we recommend you to follow while investing in ELSS –
- Do not invest a lump sum amount. Stagger your investments across the entire financial year. I would strongly recommend you to invest through a SIP (invest a fixed amount every month). As ELSS mutual funds invest in equities, you’ll gain from the volatility in the markets and take the benefit of rupee cost averaging. For example, if you’re starting to invest now (in January), you should invest 50,000/- for 3 months (Jan, Feb, March) rather than investing the full amount (Rs.1,50,000/-) at once.
- Diversify your portfolio. Do not invest in just one fund. You should spread your ELSS investment over 2–3 funds (not more, not less). So you’re not betting on just one fund manager’s opinion of the market and also, your investments are spread over varying company sectors, market caps and stocks.
- Select funds according to your risk profile. Not ELSS funds are suitable for all investors. For example, Aditya Birla Sun Life Tax Relief ’96 is a 5 star rated fund but not suitable for a conservative investor – as its portfolio is more inclined on mid and small-cap stocks. Likewise, an aggressive investor should not invest a large portion in a fund whose portfolio is more inclined to large-cap stocks. You can register and
- ELSS funds generally have a lock-in period of 3 years. But I would recommend you to stay invested for a minimum 5 years to gain maximum. Staying invested for 5 years increases the probability of a good return as you’ve invested in the funds for an extended period of time and hence, have toned down your average cost of buying.
- Invest in growth options (and not dividend options). There are two reasons for it –
- Paying dividend is entirely at the discretion of fund houses. Some months they may skip it entirely, while some months they may pay a higher amount – leading to irregular cash flows – and hence, difficult to track. If you want to get regular cash flows, set up an SWP instead (Systematic withdrawal plan) – wherein, you can schedule that a fixed amount be redeemed every month
- Dividend options are tax inefficient. From April 01, 2018, the government has levied a dividend distribution tax of 10%. Instead, if you invest in growth option, on redemption of any amount, under Income tax act, it will be considered as capital gain and long-term capital gains up to Rs. 1 lakh are tax-free in the hands of the investor.