ELSS funds are diversified equity funds having a lock-in of three years. It infers that once you invest your funds in an ELSS scheme, you cannot withdraw the same for at least three years. This lock-in, though may appear restrictive, meets a dual purpose. Firstly, it promotes long-term market investment, which is necessary for the creation of wealth. Secondly, it offers tax benefits of up to Rs 1.50 lakh under Section 80 C.
Additionally, ELSS funds have the potential to offer higher returns than other traditional tax-saving products like five-year tax saver fixed deposit, public provident fund, or national savings certificate. This makes ELSS funds an attractive choice for both beginners and experienced investors.
How can you maximise returns on your ELSS investments?
Choose the right fund
Selecting the right ELSS fund is akin to laying a solid foundation for a sturdy building. Not all ELSS schemes have the same purpose, thus it is crucial to perform in-depth research before investing your money. Begin by assessing the scheme’s record over distinct market cycles. This can endow valuable insights into the scheme’s performance in different market conditions.
Next, factor in the expertise and experience of the mutual fund manager. An experienced manager can make a considerable difference in yielding better returns. Examine the manager’s record, performance, risk management approach and investment philosophy. Moreover, assess the fund’s previous returns as compared to its benchmark indices and peer funds. While the previous performance does not assure the same performance in the future, it can make you understand the schemes’ historical performance relative to the market movements.
Stay invested for the long term
One of the vital strengths of ELSS lies in its potential to yield considerable returns over a long time period. As a retail investor, you must cultivate patience to avoid the temptation to withdraw prematurely and weather short-term market volatility. The power of compounding works best when investments are allowed to grow steadily over an extended period.
Consider ELSS investments as a commitment to your financial goals. A three-year lock-in period might seem like a constraint, but it aligns to foster a long-term investment perspective. As the equity market historically demonstrates its ability to rebound from downturns, staying invested can lead to rewarding outcomes.
Diversify
The age-old wisdom of “don’t put all your eggs in one basket” holds true when investment is concerned, especially for ELSS funds. Spreading your investments across multiple ELSS funds helps mitigate the risk associated with the performance of a single fund. Each fund might have a different investment style, sector focus, or market-cap preference. By diversifying, you minimise the impact of poor performance of any one fund on your overall portfolio.
Diversification does not just mean investing in multiple funds; it also involves considering funds with varying investment philosophies. For instance, you might include funds with a growth-oriented approach as well as those that focus on value investing. This balanced approach helps you capture a broader range of market opportunities.
Review and rebalance
While ELSS investments are designed for the long term, periodic review is crucial to ensure your portfolio remains aligned with your financial objectives. As market conditions and your personal goals evolve, it is essential to assess whether your ELSS investments are on track.
Assess not just the individual funds’ performance but even the investment portfolio’s composition. Rebalance if required to maintain your preferred asset allocation.
Conclusion
ELSS funds act as a reliable pathway to enhance returns while optimising your tax liability. The combination of tax benefits, shorter lock-in periods and potential for higher returns make them an essential addition to your investment portfolio. By selecting the correct funds, remaining invested for a long-time span, diversifying, and reviewing periodically, you can leverage the full potential of ELSS.