Steps to Invest Money in ELSS Mutual Funds
Both online and offline methods of investments require different procedure for document submission. The requirements for offline and online ELSS investments are as follows.
- Offline Investment Requirements: The most basic requirements are the key KYC documents such as Aadhaar, PAN, etc. Other than that, post dated cheques are required in the favour of the mutual fund scheme with duly filled application form/bank mandate forms are necessary. Investors can also ask the fund advisor for specific documentation requirements that might be applicable to a particular investment.
- Online Investment Requirements: Investors must complete the online registration process using Aadhaar-based eKYC to complete the registration process through an authorised channel. Once online registration is done, investors will receive a pre-filled bank mandate on their registered email ID and a final email from NSE for confirming FATCA details. Investors can then use KYC documents such as PAN, etc. to complete their registration.
Top Performing ELSS Mutual Funds Investments in 2019-20:
Equity Linked Savings Scheme (ELSS) is a type of mutual fund scheme that invests predominantly in the equity market. This is a diversified mutual fund that invests the majority of its block in equity and related funds while offering tax benefits to investors under Section 80C of the Income Tax Act, 1961. In most cases, ELSS is a diversified scheme which provides a balance between volatility and returns to investors.
Investors have the choice of investing both through Systematic Investment Plans (SIPs) and lump sum investments. Investors should try to remain invested for at least a period of 5 to 7 years for better returns as equity investments are volatile over the short term, but tend to average out over the long term. ELSS investments feature a minimum lock-in period of 3 years which can be extended by any period of the investor’s choice i.e. no block-based extensions are required. ELSS investments have shown better returns than almost all asset classes in longer term. ELSS can be obtained in both open-ended and close-ended formats.
- Open-Ended ELSS: This is a format in which investors can move out i.e. redeem their ELSS investment anytime they want after the 3 year lock-in period has ended. This is the most common type of ELSS scheme available in India’s equity markets. Investors can enter into i.e. invest in these schemes at their convenience.
- Close-Ended ELSS: In this format, investors cannot move out before the specified time period, which is greater than the 3 year lock-in period of the standard ELSS. The investments into such schemes can only be made during the New Fund Offer (NFO) period. Investments in these schemes cannot be made beyond this NFO period.
Tax Benefits of ELSS:
The amount of investment in an ELSS during a financial year is eligible for exemption from income tax. ELSS is qualified for tax exemption under section 80C of the Income Tax Act 1961 up to the Rs. 1.5 lakhs annual limit. Till March 2018, redemption after completion of the lock-in period was completely tax free. This has now changed as long term capital gains (LTCG) at 10% is applicable to equity redemptions in excess of Rs. 1 lakhs during a financial year. No indexation benefit is applicable to these redemptions.
Key Features of ELSS Tax Saver Mutual Funds
The following are other aspects of the ELSS tax saver funds. Investors can choose between the various options to invest in ELSS. However, the choice depends on the expertise and market experience of the investor. ELSS has two investment options. One can either invest in a direct scheme or in a regular scheme.
- Direct Mutual Fund Scheme: Investors opting for this scheme have to manage and maintain their fund investments on their own. Direct investors taking the paper route are required to visit the concerned fund house representative branch with all relevant documents. A big advantage of this type of investment is the low expenses ratio as they can save money on the commissions charged by mutual fund distributors. Most fund houses charge a commission at nominal rates but it adds up to huge amounts of money over a longer tenure. In addition, this investment option is good for the investors who have a fair understanding of the market and have the time and resources to dedicate to the research, tracking and management of their funds. The advent of online investment has made direct investments much easier. Those investing online can make direct plan investments through the fund house website, website of RTA such as CAMS and select distributors who provide direct plans such as Paisabazaar.
- Regular Mutual Fund Scheme: This is the most common type of mutual fund investment where investors can invest through brokers and fund managers to make investments on their behalf. This way, investors have to pay a commission to their fund house but they can also be relaxed that their money is in hands of experienced professionals. It is a good option for beginners and regular investors who are not financially savvy or lack the time to complete investment related tasks properly.
- Growth Plan: This is a plan or variant of an ELSS scheme in which investors leave there investment for the specific duration and do not receive returns such as dividends while they stay invested. The returns from growth plan are accumulated over time and investor receives profits through redemption of units at a higher NAV as compared to the NAV at which the units were purchased.
- Dividend Option: Under this option, investors receive regular dividends from their investment made into the ELSS scheme. Though all dividends are tax-free in the hands of investors, dividends of ELSS are currently subject to DDT (dividend distribution tax) of 10%.
Key Characteristic of ELSS Investments
Some important characteristics of ELSS are explained in the following sections:
- ELSS allows investors to invest via the SIP route. This makes investments easy as most investors do not prefer to invest all of their savings in the market in one go when they have the opportunity of making small investments each month to make a larger corpus over time.
- Being a long-term investment instrument, ELSS is minimally impacted by short term volatility that gets balanced out in the long term. Even in the tough market conditions, investors cannot panic and redeem their investment during the lock-in period. This reduces the redemption pressure on fund managers allowing them to take long term investment bets that work best in case of equity investments.
- The primary aim of ELSS is capital appreciation along with tax benefits for investors and because of this is a potentially high risk – high return asset. ELSS offers potentially higher returns as compared to other savings plans such as NSC, PPF, etc. even though the latter ones have a longer lock-in period.
- ELSS has no upper limit for investment. This means that investors may invest as much as money in the scheme as much they want however the tax benefits will be capped at Rs. 1.5 lakhs annually under Section 80C of the Income Tax Act. Investments beyond the said limit will not provide any returns.
- Mutual funds used to have a high entry load as an upfront fee that was charged by the mutual fund company on the initial investment. Entry loads were abolished in 2009 by a SEBI directive and are not applicable to ELSS or other equity mutual fund investments. Redemption charges/exit load is not applicable on ELSS. The scheme management charge designated by the total expense ratio (TER) of the scheme is lower in case of direct plans as compared to regular plans.
- ELSS comes under long-term mutual funds but the lock-in period is actually the shortest among all tax saving schemes. A lock-in period of 3 years means that the investors can withdraw his/her investments after maturity but one can also choose to remain invested in the scheme after completion of the lock-in period. This extended tenure does not mean that the investment will be locked again for an additional three years. In fact, one is free to redeem his/her investment any time after the 3 year lock-in period of the ELSS has ended.
- ELSS is an excellent tax-saving instrument. When one compares it to traditional tax saving instruments one will find that potentially higher capital gains make it an obvious choice for risk tolerant investors. Also, if one invests in ELSS for a longer tenure, it allows the investor to generate superior inflation-proof returns in comparison to other asset classes.