How To Choose ELSS Funds Based On Your Investment Objective?

(Article dated 03 March, 2020)

If you are someone with a moderately high risk appetite with a long term investment objective who wishes to seek capital gains through equity investments, you might want to consider ELSS as a solution to your taxes. ELSS is tax saving mutual fund scheme which not only gives investors some opportunity to turn small investments into a decent corpus but also has tax benefits.

If you wish to find out more about this tax saving fund, read further:

What is ELSS?

Equity Linked Saving Scheme is an open ended tax saver fund which comes with a statutory lock-in of three years. Investors cannot redeem their ELSS units for three years at least. ELSS probably has the shortest lock-in period among tax saving instruments. Also, as per Section 80C of the Indian Income Tax Act, 1961, any tax paying individual can invest up to Rs. 1.5 lakhs* per fiscal year and claim tax deduction for the same.

Here is an example to help you understand ELSS better:

If you are earning Rs. 16 lakhs per annum that brings you under the 30 per cent tax slab. If you want to bring down your gross annual income, you can invest up to 1.5 lakhs in an ELSS fund and bring down your taxable income to Rs. 14.5 lakhs.

There is no upper limit for ELSS investments, but you cannot claim for tax deductions over Rs. 1.5 lakhs per fiscal year.

Here are a few things to keep in mind while choosing ELSS funds based on your asset allocation:

• Invest according to your risk appetite: A lot of times, people end up investing because their colleague or friend used the same financial tool for saving taxes. But what most people deter to understand is that every individual’s risk appetite is different. Hence, it is advisable that you first understand your risk tolerance before investing in a tax saving fund like ELSS. Remember that being an equity related scheme, ELSS invests majorly in equity and equity related instruments. Equity markets are highly volatile, and hence returns from such investments are never guaranteed. So if you are a risk averse investor who doesn’t wish to expose his/her finances to market vagaries, you should reconsider investing in ELSS.
• Investment horizon: Although ELSS comes with a three year lock-in, it is better that you keep a long term investment objective and remain invested in this tax saver fund for a more extended period of time. That’s because equity related schemes have given better growth when stayed invested for the long run. If you wish you can even club ELSS to help, you meet long term goals like retirement planning. However, make sure that the scheme you invest in holds the potential to help you get closer to your ultimate financial goal.
• Fund manager: Equity linked saving scheme is an actively managed fund that involves the active participation of the fund manager. The fund manager with his/her years of experience and expertise, buys and sells securities/shares to meet the scheme’s investment objective. Hence, it is better that you invest in an ELSS fund that is handled by a professionally capable fund manager.
• Diversification of portfolio: Investors have to bear in mind that if they want to reduce the risk from their overall financial portfolio, they need to give their folio some diversification. Investing in a tax saving scheme like ELSS might offer them this diversification. But they should remember that ELSS comes with a three year lock-in and if they seek diversification, they might want to consider investing in other schemes as well.

So if you too have decided on investing in ELSS to save taxes and seek capital appreciation, you can consider investing in ELSS fund offered by Axis Mutual Funds. Axis Long Term Equity Fund is an open ended scheme which comes with a three year lock-in and tax benefit. The investment objective of this scheme is to achieve long term capital gains through dominant investments in equity and equity related instruments. So if you want to increase your chances of earning some growth and want to save tax at the same time, you may consider Axis Long Term Equity Fund as an investment option.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

Axis Long Term Equity Fund

(An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit)

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.