ELSS is not just a three year investment option
Tax-saving funds have three year lock in. However, you need
not necessarily sell them after completion of three years.
Investors often think about equity linked savings schemes
(ELSS), popularly known as tax saver mutual funds, as a three year investment
but this might not be the right way to look at it. There are various conditions
and points related to this instrument that needs some additional thought on the
part of the investor and hence they must be careful in arriving at a hasty
decision. ELSS funds are equity diversified funds that invest their money
across different sectors that also have a tax element added to it. The tax
benefit is in the form of a deduction as the ELSS is an eligible investment under
Section 80C of the Income Tax Act. Here is a detailed look at the issue and how
things can be considered.
Lock in
Since there is a tax benefit that is associated with the investment into an ELSS there are some other conditions that follow along with it. First one has to consider the fine print of the tax benefit under Section 80C. The amount that is invested into the fund during the financial year is available as a deduction from the taxable income of the individual. This means that the income on which tax has to be calculated will be reduced and a lower amount will be the figure on which it has to be paid. However along with this there is also a lock in that is present which is for a period of three years. This means that the investor cannot sell the investment for a period of three years from the date of investment but it does not say that once the lock in is over it has to be compulsorily sold. This is a big difference that has to be understood by the investor. Holding the investment for as long as required after the completion of the lock in is permissible so this can be made use of.
Long term investment
An equity investment is a long term investment which should stretch for 5 years or more and the ELSS is no exception to this. Investors who are looking to invest in the fund need to have framed a longer term outlook for their investment and hence they should be waiting for the time period to play out and the results become evident. It could be that in the three years that there was a lock in the market conditions were not very strong and this has led to a poor performance of the fund. The fund invests in equity and hence there will not be a linear performance witnessed in it but it can vary significantly and there could be a position wherein the entire returns are generated in a short period of time. The best way to tackle the whole situation is through a patient holding of the investment and hence the outlook for the investor should be for a period of more than three years which means that there is no need to sell immediately after the lock in period has been lifted.
Compounding
The investor in an ELSS can look for the benefit of compounding wherein the tax benefits can multiply and at the same time there is a build up of the capital in the fund. The dividends that are earned on the fund are tax free in nature and these if reinvested will count as an additional investment so ensuring that one has chosen the dividend reinvestment option will give tax benefits for years. At the same time the overall amount that is invested in the fund will be rising and this will give the investor the benefit of compounding which means earnings on a larger base. This will be the real manner in which an investor can get multiple benefits from their investment in an ELSS and is something that every investor should consider.
Lock in
Since there is a tax benefit that is associated with the investment into an ELSS there are some other conditions that follow along with it. First one has to consider the fine print of the tax benefit under Section 80C. The amount that is invested into the fund during the financial year is available as a deduction from the taxable income of the individual. This means that the income on which tax has to be calculated will be reduced and a lower amount will be the figure on which it has to be paid. However along with this there is also a lock in that is present which is for a period of three years. This means that the investor cannot sell the investment for a period of three years from the date of investment but it does not say that once the lock in is over it has to be compulsorily sold. This is a big difference that has to be understood by the investor. Holding the investment for as long as required after the completion of the lock in is permissible so this can be made use of.
Long term investment
An equity investment is a long term investment which should stretch for 5 years or more and the ELSS is no exception to this. Investors who are looking to invest in the fund need to have framed a longer term outlook for their investment and hence they should be waiting for the time period to play out and the results become evident. It could be that in the three years that there was a lock in the market conditions were not very strong and this has led to a poor performance of the fund. The fund invests in equity and hence there will not be a linear performance witnessed in it but it can vary significantly and there could be a position wherein the entire returns are generated in a short period of time. The best way to tackle the whole situation is through a patient holding of the investment and hence the outlook for the investor should be for a period of more than three years which means that there is no need to sell immediately after the lock in period has been lifted.
Compounding
The investor in an ELSS can look for the benefit of compounding wherein the tax benefits can multiply and at the same time there is a build up of the capital in the fund. The dividends that are earned on the fund are tax free in nature and these if reinvested will count as an additional investment so ensuring that one has chosen the dividend reinvestment option will give tax benefits for years. At the same time the overall amount that is invested in the fund will be rising and this will give the investor the benefit of compounding which means earnings on a larger base. This will be the real manner in which an investor can get multiple benefits from their investment in an ELSS and is something that every investor should consider.
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