ELSS (Equity Linked Savings Schemes) funds are undoubtedly one of the best tax savings schemes available to investors. A quick look at how ELSS funds have fared historically will reveal that its consistently outperformed other tax-saving investment options. These equity-linked mutual funds schemes offer tax benefits under 80C of the income tax act. Aside from tax benefits, there are many other advantages of ELSS funds for an investor. They give investors the option of short lock-in periods with higher ROI, generate tax-free income, all the while amassing a long-term corpus to meet your financial goals.
All these advantages have made ELSS an interesting investment avenue for new and experienced investors. With its growing interest over the years, there are unfortunately a number of myths that have emerged with the mutual fund scheme. These myths are primarily why ELSS is looked upon with a certain degree of skepticism. The article aims to debunk some of these popular myths and explain why ELSS is still a great investment choice for many.
#1 You can invest only ₹1.5 Lakhs
This is perhaps the biggest myth about ELSS mutual funds. In reality, you can invest as much money as you like. Under 80 C of the Income Tax Act, investors can avail of only ₹1.5 Lakhs of tax benefits under the scheme. However, this does not stop you from investing as much as you want and for as long as you want to remain invested in the fund.
Additional Read: 5 Ways to Minimize your Taxes and Maximize Investments
#2 Three Year Lock-in Period
This myth is based on the fact that the three-year lock-in period results in the ELSS scheme maturing immediately after the three years are over. The fact is that although you can’t withdraw your money before the lock-in period, you can remain invested for as long as you want. After the completion of the three-year lock-in period, you don’t necessarily have to withdraw your funds. Also, investors should not by default expect payment at the end of the maturity term. To receive payment, investors must initiate withdrawal once the lock-in period ends.
#3 ELSS is a Short Term Investment
Another big myth is that ELSS is a short-term investment option. This is primarily due to the three-year lock-in period. Because ELSS is an equity-linked mutual fund, it is prudent to remain invested for five years or more. This way, investors will enjoy the benefits of compounding interest. The longer you remain invested the more returns you can expect for your investment.
#4 ELSS Schemes are Risky
There is a widespread belief that investing in equity linked mutual funds is highly risky and is thus best avoided. However, the truth couldn’t be further from this. Due to its equity nature, there are a few inherent risks involved. But in the grand scheme of things, the risks are miniscule when you consider the return you receive on your investment. In fact, ELSS schemes are perhaps one of the best investment options in the long-run.
Additional Read: ELSS: Wealth Creation Analysis
#5 Having a Demat Account is Necessary
Another myth about ELSS schemes is that they can only be purchased through a Demat account. In truth, you do not need a Demat account to invest in ELSS. If you have a Demat account, you can very well use it to make investments. However, this can also be done through an AMFI-certified mutual fund advisor or directly through a fund house’s website
#6 Low NAV Funds are Cheaper
In reality, low or high NAV (NET Asset Value) has nothing to do with the scheme’s performance since it is based on percentage terms. If two funds with different NAVs give you 15% returns, in both cases your portfolio will go up by 15%. Thus, the NAVs of both will grow at the same proportion.
#7 Imminent Dividend Declaration will Add to Gains
In reality, a scheme’s NAV falls by the same proportion as the dividend distributed. A consistently outperforming fund may not declare a dividend soon, but may do so in the future. It may handsomely reward you in the long run with its performance.
#8 Recent Outperformers are “Safe Bets”
In reality, many people buy last year’s outperforming funds, however, the condition that made the fund an outperformer may subsequently cease to exist. Make sure you look at fund performances over the last 3 – 5 year periods before you decide on safe bets.
#9 ELSS is too Complex
In reality, ELSS is just like any mutual fund scheme except that it has a three-year lock-in period. And you can begin investing in ELSS with an amount as little as 500INR, which makes it easy and affordable for most people.
As with everything investments related, there are inherent risks associated that require sufficient planning ahead of time. ELSS is not any different. The better prepared you find yourself, the higher chances of a great return you should expect. Don’t fall for the myths mentioned above, you might just miss a great investment opportunity that promises a bountiful return.
The Invesco India Tax Plan, Kotak Tax Saver Fund, Mirae Asset Tax Saver Fund & Tata India Tax Savings Fund will help you grow your investments progressively.
For more assistance on ELSS and other tax-saving options, turn to Tata Capital Wealth.