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Home / Mutual Funds / News /  Tax saving mutual funds: Things to know before investing in ELSS

Tax planning is an activity best taken up in April. Never the less a lot of us rush to explore and invest in the various tax-saving investments towards the end of the financial year. With only three more days left in this financial year, there’s a last-minute rush to explore the various instruments. There is a big basket of products that qualify for deduction under Section 80 C of the Income Tax Act. One such option is the ELSS mutual fund, with a lock-in period of 3 years, which offers a maximum tax deduction of up to 1.5 lakh in a financial year.

What are ELSS mutual funds?

ELSS is an equity-linked savings scheme. It gives investors multiple benefits such as tax savings, wealth accumulation and the lowest lock-in period among all tax-saving investment options.

The selection of products for tax savings should be guided by the overall asset allocation of the investor. If the asset allocation calls for investment in equity, then ELSS should be the choice

Renu Maheshwari, SEBI registered investment advisor, CEO and principal advisor at Finzscholarz Wealth Managers LLP, shares the factors that need to be factored in while choosing an ELSS:

1) There is a lock-in period of 3 years. Any fund that you choose should have a long term investment perspective

2) Look at the underlying theme of that particular scheme. A multi-cap portfolio with a predominance of large-cap is a better option for the long term.

3) Look at the past long-term performance of the scheme and choose.

4) Compare the expense ratios.

5) If you are investing on your own, go for the direct option. If you are investing through an advisor, go to a fee-only SEBI Registered Investment Adviser. That way you can be sure of unbiased recommendations.

For first time investors

Renu Maheshwari advises first-time investors not to merely go after the funds just because equity gave very good returns last year. "If you are a first-time investor, do not invest in ELSS just because equity gave great returns last year. The investment should be driven by asset allocation not just a short-term performance of a particular asset class," she said.

Should you invest?

Vidya Bala, co-founder, Prime Investor, a mutual fund research portal, says that understanding a fund's style is important before investing.

"Different ELSS have different market cap and investing styles and are not uniform. As with any other equity funds, understanding the fund's style (value or growth or focused) and whether it is large-cap biased or more aggressive midcap-oriented is important before investing. This will determine whether an investor can handle the risk relating to the fund," said Bala

Gaurav Mashruwala, Certified financial planner and founder, Gauravmashruwala.com, says one should always invest keeping in mind their financial goals.

"There is nothing new in this. Don't invest in tax saving instruments. Invest based on your financial goals and then if you find tax-saving instruments opt for them. Always look at the bigger picture." said Mashruwala.

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