It's that time of the year again when the country is going berserk to save tax! Employers are busy deducting TDS, funds are busy marketing ELSS, customers are busy finding best performing ELSS funds and the media is busy writing eye-catching articles for a category that has been in existence for more than a decade.
So what new facts do we have to tell that you already don't know? Between the many pros and cons that are pitched to investors about the almighty ELSS, here are 4 things you should definitely know about them -
Assumption - I need to invest 1.5L to get the full benefit of 80C.
For most salaried people, this is completely wrong! Your employers deduct a small amount every month from your salary that goes towards investment in PF. There are two parts to it, employer contribution and the employee contribution. The employee contribution is already accounted towards section 80C deduction you are so keen to avail. This amount may add up to few thousands or even more than 1.5L over the year. You only need to invest enough to avail the remaining benefits after accounting for the PF contributions. For eg: if the PF deduction is 2000 per month, you only have remaining 80C benefits of
1,50,000 - (12*2,000) = 1,26,000.
We are not saying that investing more is a losing proposition. But all ELSS funds have a minimum lock-in of 3 years. And it is high-risk equity. You'd rather invest in alternate options that give better return/liquidity than investing more than the beneficial amount in an ELSS.
Assumption - I invest directly in the scheme, through my bank account
Banks and fund house are completely different entities. For every scheme you buy through a bank, you'll end up paying about 1% per year as commission to the bank. If you invested 1.5L, you'll end up losing about 5000-7000 due to commissions over three years. The longer you stay invested, the more commission you end up paying. Just go to the fund house site and invest directly through them. Or sign up at Expowealth and invest in schemes of 26 fund houses with a single account.
Suggestion - Don't just chose the scheme of the fund house that gave the best return last year / three years
While that is a good start to adjudge performance, consistency of returns is equally important as high returns. Research schemes that have given a decent return over a longer period consistently. For recommended schemes, you can view the shortlisted schemes on Expowealth as well.
Finally, ELSS is not the holy grail of 80C deductions!
ELSS may have the shortest lock-in period of 3 years among all 80c eligible options. But invest only with the horizon to stay invested for at least 5 years. Equities are risky and returns may be very volatile in short/medium term. Invest wisely. For those with a less risk appetite, there are alternate options in PPF, NPS etc. Whatever you do, know the risk, return and liquidity profile of any instrument you invest in.
Happy investing. And happy tax saving!