ELSS: The savings scheme you MUST have in your portfolio this year

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You wish to add to your investments portfolio this year, and are looking for good options. We suggest the ELSS (Equity Linked Savings Scheme) - read on to know why.

What is an ELSS?

The ELSS fund is an investment option which invests in high grade equity securities. It functions like a diversified equity mutual fund and offers a good rate of growth apart from tax benefits. It has a lock-in period of three years - the shortest among all mutual fund schemes in India - after which you can either take the returns from the investment or reinvest them for a further period. Staying invested for longer yields higher returns since these are equities, which perform better with reduced risk over a longer time frame.

The best reasons to include an ELSS fund in your portfolio

• For the best returns: When you stay invested in the ELSS for long, the instrument can effectively outperform non-equity and popular investment options like PPF and NSC. The returns on equity funds are normally guaranteed because the value of your invested sum increases as the stock market index rises. Apart from the returns generated, you can also earn dividends on the ELSS investment. The dividends are paid, i.e., the income is generated, even during the lock-in period.
• A short lock-in period: Most investment options in India have long lock-in period, i.e., you cannot exit the investment prior to this period. For instance, PPF has a lock-in period of 15 years but you can partially withdraw against the fund after seven years have elapsed. Another popular investment option, the NSC (National Savings Certificate) has a lock-in period of six years. Meanwhile, the ELSS has a lock-in period of just three years. At this point, you can choose to exit your investment in the ELSS and take your earnings, or continue with the investment for higher returns.
• To save taxes: Most mutual funds are not tax exempt, but the ELSS is one of the top taxes saving mutual funds in India. Your ELSS tax benefit is extended to Rs 1,50,000 per year under Sec 80C of the Income Tax Act, 1961. Not just your investment, even the returns on the ELSS fund are tax exempt. This results in substantial gains on your investment.
• To stay invested for a longer term: The ELSS fund inculcates fiscal discipline if you invest via an SIP (Systematic Investment Plan). Using an SIP, you can make monthly payments of a smaller size, thereby making it easier to stay invested and focussed on the end goal. It also makes the investment habit an easier one. The ELSS tax saving fund has a lock-in period of just three years, but your portfolio does much better when you stay invested for a longer time and allow the investment to mature well.

How to invest in an ELSS

Since the ELSS is a mutual fund, you can invest in it the same way that you invest in mutual funds. The most preferable mode is by opening an online account or having your investments advisor to open it for you. You can invest in the ELSS either in the form of a lump sum amount, or go the SIP route.

' Start by determining your tax bracket: Once you are clear about your taxable income and tax slab, you can choose the best sections to save taxes with the right products.

' Check the fund's past performance: How the fund has performed over its course (i.e., from inception) determines how good it is, and whether it aligns with your financial goals. Though past performance cannot guarantee future success, it can give direction to your investment and help you base your final decision. However, you must check the fund performance over a period of at least 3 to 5 years, and not a few months, especially if your investment horizon spans a long term.

' Check the fund's XIRR (Extended Internal Rate of Return): The XIRR is a term that indicates the internal rate of return for scheduled cash flows. It is measured in the context of periodic investment in the ELSS fund, such as with SIPs. Computing the XIRR helps you filter the best ELSS schemes and invest in them.

' Make the investment online: Once you have chosen the fund, you can invest it in online in a few steps. Create an online account if you don't have one (get your fund manager to do this) and fill in the proposal form with personal and FATCA details. Next, enter the bank details and upload the image of the cancelled cheque from the account that you wish the investment to be made. You can now choose the selected fund and start your investment.