Equity linked savings scheme (ELSS) is a mutual fund which can be invested via SIP or as a lumpsum with a lock in period of three years primarily for tax benefit. However, there are many things to be considered before taking a decision to invest in ELSS.
Things you must know about Equity linked savings scheme
Suppose a person has invested in ELSS via SIP (Systematic Investment Plan) then, the returns also will be through SIP. For example, if a person has invested Rs 5000 on January 1, 2018, he can redeem it in Jan 2021 only. Similarly, February 2018 SIP will end in February 2021. Every SIP installment carries a lock-in period of three years.
If ELSS is invested as a lumpsum then there will be a tax benefit for one year only. If an individual wants tax benefit for the next year he must invest again. The investor is not entitled for tax benefit for all the three years.
Though ELSS is generally chosen for tax benefit, it is not necessary to redeem after three years If an individual stay invested for long-term of six to seven years he will get returns and he will enjoy the benefits of power of compounding.
If an individual has reinvested again, then fresh lock in period of three years start again. In three years, market would be highly volatile. To get more returns, it is advisable to stay in the market for five to seven years. However, many investors often redeem the ELSS investment as soon as the lock in period of three years ends. They reinvest in fresh ELSS to claim tax benefit.
If the fund is not performing well, it is advisable to exit but to achieve your financial goals you need to stay invested for the capital to grow. In three years there is a probability of negative returns also. So, review the performance of the scheme and if the scheme has lower benchmark, the investment may be shifted for better returns.
Confusion between SIP and lump sum
If a person has not planned for investing in the beginning of the financial year and at the end he wants to invest in a scheme to have tax benefit, then he or she can invest via lumpsum. Ideally, one should invest via SIP because it would fall easy on the pocket and moreover one gets to enjoy the benefit of market timing. To be more precise if one invests through SIP, rupee averaging out can be done and one can get units based on the
NAV of the fund.
To conclude, redeem only in case of financial need or stay invested to enjoy the benefits of the power of compounding. The investor gets a dual benefit of no exit load and tax exemption also. (The author is a homemaker who dabbles in stock market investments in free time)