7 golden tips to maximize ELSS fund returns

Considering taxpayers can deduct up to 1.5 lakh in taxation per financial year, Section 80C of the Income Tax Act is the most common way for them to reduce their tax burden. Investments that qualify for tax savings under Section 80C include a variety of products, including bank fixed deposits, National Pension Scheme (NPS), Unit Linked Insurance Plan (ULIP), Equity Linked Saving Scheme (ELSS) and post office small savings schemes. However, out of all of these instruments, the Equity Linked Savings Scheme (ELSS) is the most well-known because it has the shortest lock-in period of 3 years—and has a track record of producing better returns over the long term than fixed deposits, post office schemes, and other tax-saving investments that fall under section 80C. 

Since ELSS funds must be held for at least three years, any proceeds gained from the sale of those units would be considered long-term capital gains (LTCG), which are subject to a 10% tax rate on capital gains over Rs. 1 lakh. Since investing in ELSS funds through a SIP is the predominant mode for maximising returns because it produces a compounding effect, requires a low initial investment of only 500, provides rupee cost averaging, and gives you the freedom to set the amount of your monthly contribution in accordance with your budget. 

However, there are more strategies to increase your return on investment in addition to this ELSS tip. Based on an exclusive interview with Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo, the spokesperson said ELSS stands for Equity-Linked Saving Scheme. It is a type of mutual fund in India that invests primarily in equity shares of companies and also offers tax benefits to investors under Section 80C of the Income Tax Act. There are a few strategies that may help increase the returns of an Equity-Linked Saving Scheme (ELSS) investment:

1. ELSS funds have a lock-in period of 3 years, the shortest lock-in period among all the tax-saving options available under Section 80C. These funds also have the potential to generate higher returns compared to other tax-saving options. Considering ELSS funds as a part of your tax planning can help you to save tax up to the extent of Rs. 46,800.

2. Start a SIP in an ELSS scheme for the long term. After completion of 3 years, in the 37th month, start a Systematic Withdrawal Plan (SWP). The SWP can be in the different ELSS schemes for the same amount for the coming years. The lock-in period of ELSS Investments ends after 3 years. So, you will be free to withdraw the number of units that you purchased 36 months ago. With this smart hack, your 1st-month investment is withdrawn in the 37th month and pays for the 37th-month ELSS investment. In effect, your ELSS investments become self–sustaining without requiring a fresh contribution from your income and help you utilize the 80C section without budgeting for fresh investments.

3. Tax gain harvesting in an ELSS fund is a strategy where an investor sells units of the fund that have appreciated in value, in order to realize a gain of upto 1 lac which is exempt from tax. This is to stop the gain amount from accumulating exceeding 1 lac as it leads to taxation of 10%. The investor can then use the proceeds to repurchase units of the same or similar ELSS fund to maintain their overall position. It is important to note that the lock-in period of 3 years for ELSS funds, which means that an investor cannot redeem the units before 3 years of the date of allotment.

4. As ELSS mutual funds have a lock-in period of 3 years, align your ELSS investment with your medium-term financial goals that match the tenure of 3 years. ELSS mutual funds as a category have delivered a CAGR of 16.07%, 10.55% and 14.74% in the last 3 years, 5 years and 7 years respectively.

5. Choose the best ELSS mutual fund to generate maximum returns based on the factors such as historical returns of at least 5 to 10 years, the fund manager’s expertise and track record, expense ratio, portfolio allocation and risk measures of the scheme and compare it with the performance of the benchmark and peer ELSS mutual fund schemes.

6. When investing in an ELSS fund via SIP route, you should be aware that each individual SIP will be locked in for the subsequent three years from the date of investment. In case of an ELSS SIP, every installment will be locked for three years. For example, if you start a SIP of 10,000 per month on April 1, 2020 for one year. The first installment will be locked till April 2023, while the second installment will be locked till May 2023, and so on.

7. It is further suggested that investors should just not rely on short-term performance and should make investment decisions based on long-term trajectory and consistent performance of the fund.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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