5Mistakes/Misconceptions to avoid in ELSS Funds Investment

ELSS (Equity Linked Savings Scheme) Funds are the open ended equity mutual fund that helps you to save tax and to grow your investment by capital appreciation.

ELSS are the most preferred tax Savings Avenue for assesses nowadays. There are few mistakes /Misconceptions which has to be avoided while investing in the ELSS Funds.

1) Purchase on Last day of Financial Year:

ELSS Funds purchased during the financial year is allowed to get exempted from income of the Tax Payer under Sec 80 C of Income tax act up to maximum of Rs 1.5 Lakhs. Units of the ELSS Funds has to be in demat/folio before 31^st March of every year.

# Few Investors purchase ELSS Funds on the last minute/last day of Financial Year to avoid taxes. ELSS funds has cut off timing at 2.00 PM on all working days. If it is invested after 2.00 pm on last working day. Allotment of units takes T+1 days by the AMC. So units gets allotted only in the next financial year. This will not qualify for the Income Tax Deductions.

For FY 19-20, Investments made 29^th March 2019 before 2.00 pm gets qualify for the Tax Deductions. Since 30^th and 31^st are holiday for the Mutual Funds.

Mentotax Recommends to Invest in ELSS Funds via SIP to avoid last minute hurdles.

2) Investing in Normal Funds:

In rush to avoid taxes, People invest in normal funds by mistake instead of ELSS Funds in the last minute. Planning your taxes in the beginning of financial year is advisable. Investment in normal funds will not qualify for tax deductions.

# Investing in normal funds by mistake and redeeming it to purchase ELSS Funds is time consuming and involves cost. Normal Funds redemption will take minimum T+2 days for proceeds to hit your account and they carry carry exit load of 1% if it is redeemed before 1 year from date of purchase.

Mentotax advises you to select the ELSS Funds correctly before Investing.

3) Holdings of ELSS Funds

ELSS fund have statutory lock in period of 3 years. Few Investors have misconception that they can claim tax deductions for next 3 years on the investment and holdings in ELSS funds.

# New Investments made during the financial year only will qualify for the tax deductions and Assesse shall not claim tax benefits on the holdings of ELSS Funds purchased during the previous financial years.

4) Lock In for 3 Financial Year:

ELSS Funds invested will have to be held for minimum 3 years from the date of allotments of units. Each Purchase will have compulsory 3 years lock in period.

# Few Investors have misinterpretation that ELSS fund have lock in period of 3 financial year. Units will be available for redemption only if each investment completes 3 year from the date of allotment of units.

Example:

Investor purchased ELSS Fund on 5^th of April 2019, and units gets allotted on 6^th of April 2019. It will be available for redemption only on 7^th of April 2022. Each Purchase will have 3 year lock in period and not all the investment made on 2019 is available for redemption in 2022. And people also think that it has to be redeemed after 3 years. Your investment grows as long as it is invested.

5) Taxation:

ELSS Funds qualify for the Tax deduction every year on the investments but attracts Long Term Capital Gain (LTCG) Tax of 10% for the redeemed portion in excess of Rs 1.00 Lakh every year.

# Assesse think that ELSS Funds can be redeemed after 3 years without tax liability on the investment and capital appreciation. But it is only allowed up to Rs 1.00 Lakh/Year. If the amount redeemed exceeds Rs 1.00 Lakhs, Tax Payer has to pay 10% LTCG on the proceeds.

Mentotax recommends to Invest in ELSS Funds even though it attracts LTCG Tax of 10% for amount exceeding Rs 1.00 Lakhs because of Potential capital appreciation and Compounded returns in ELSS Funds.

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5 Things to Know Before Investing in ELSS Funds

Equity Linked Saving Scheme (ELSS) are the great options for tax saving investments. ELSS Funds have statutory lock in period of 3 Years. So once the money is invested it cannot be redeemed until the lock in tenure is completed. It is always recommended to analyse and invest in better Elss funds.

Mentotax brings you 5 Things to Know before investing in ELSS Funds:

# AUM Size:

First and foremost thing that you have to look in a ELSS Fund is the Asset Under Management (AUM). AUM is the total assets that the fund is holding in the market. Higher AUM Size indicate the positive and stability of the fund.

# Expense Ratio:

Expense ratio is the fee charged by the Asset management company to manage the assets/investments of the investor. It is otherwise known as funds utilized for operative and administrative expenses of the scheme. Lower expense ratio indicate better the ELSS Funds. Be Specific while selecting ELSS Funds with lesser expense ratio.

# Standard Deviation:

Standard deviation measures the volatility of the returns in relation to the bench marked/Average return. SD Infers how much the fund can deviate from the historical returns of the scheme. If Standard deviation is higher, Volatility of the fund is also higher. Mentotax recommends to prefer the fund with lower Standard deviation.

Example: Standard deviation of the fund is 4% and Average return of the fund is 10%. It refers that fund may give return 6% to 14%

# Sharp Ratio:

Sharp ratio measures risk adjusted return. It helps investor return of investment compared to its risk. Sharp ratio is the average return earned in excess of the risk free rate. Sharp ratio can be used as powerful tool for fund selection and compare between two funds for additional return for the same risk. Greater the sharp ratio, More attractive the risk adjusted return of the fund.

Sharp ratio= (Average Fund Return – Risk free Rate)/Standard deviation of the fund.

# Treynor Ratio:

Treynor ratio is also used for measuring risk adjusted return. It infers returns in excess of what could have been earned on the riskless investment for each unit of risk taken. Treynor ratio indicates the reward to investors for taking the investment risk. Higher the treynor ratio, better is the risk adjusted return of the fund.

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Equity Linked Savings Scheme (ELSS) Funds

Equity Linked Saving Scheme (ELSS) is a type of mutual funds which invest at least 80% of the portfolio in equity instruments. ELSS Investments qualify for the tax benefits under section 80C of income tax act up to maximum of Rs 1,50,000/-

ELSS Fund offers Tax Benefits on the investment because most of the funds are utilised for the economic growth of the country. ELSS funds will have a minimum lock in period of 3 Years. Investing in ELSS has given better returns compared with other small savings instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) etc

Mentotax recommends to Invest in ELSS for the following reasons:

# Save Tax:

Investing in ELSS funds can save tax up to Rs 46800 for person in 30% Tax slab, Rs 31200 for assesse in 20% Tax Slab and Rs 7800 for those who are in 5% Tax Slab.

# Create Wealth:

Elss funds help the investors to create wealth in long term by capital appreciation of the amount invested. Equity has delivered better returns compared to other asset classes over the years

# Short Lock In Period:

ELSS Funds have minimum lock in period of 3 Years. Compared with other small savings instruments like Public Provident Fund (PPF) has got 15 Years.

# Invest Small:

Investors can invest as small as Rs 500/- in ELSS Fund and no maximum cap on investments.

# Compounding Benefits:

ELSS fund delivers compounding benefits on the investment. It is always recommended to invest as early as possible.

#Systematic Approach:

ELSS fund can be invested via Systematic Investment Plan, Investing Regularly for the fixed sum of amount for Pre fixed Tenure. SIP gives better rupee cost averaging.

# Diversification:

ELSS Funds invest in various sectors, Companies across the equity segment. Investing in ELSS is always consider superior compared to direct equity.

# Tax Free Gains:

Capital Gains Up to Rs 1,00,000/- is exempted from Long Term Capital Gain Tax redeemed per financial Year.

# Inflation Beating Returns:

Inflation Is the general rise of Price levels. ELSS Funds Outperformed inflation beating returns compared to other traditional investments like Bank FD etc

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