Equity-linked savings scheme (ELSS) is a tax-saving mutual fund scheme that combines the benefits of both equity investments and tax savings. ELSS funds invest predominantly in equities, offering retail investors an opportunity to grow their wealth while enjoying tax benefits of up to Rs 1.50 lakh under Section 80C. This unique investment product has acquired significant popularity due to its potential for high returns and a relatively shorter lock-in period of three years. However, investing in ELSS not just helps in tax reduction but even opens doors to capital appreciation and wealth creation. Discussed here are the top four important strategies to maximise your returns on ELSS investment –
Top four strategies to maximise your returns on ELSS investment –
Invest through a systematic investment plan (SIP)
Adopting a disciplined approach through systematic investment plans (SIPs) is a prudent strategy for maximising returns on ELSS funds. By investing a fixed and small amount at regular intervals, investors can benefit from rupee-cost averaging. As per this concept, SIPs allow the accumulation of more units during market lows and fewer units during market highs, thus reducing the overall average cost per unit. This strategy acts as a cushion against the effect of market volatility and enhances the potential to generate wealth over the long term.
Choose a long-term investment horizon
ELSS funds are designed to provide optimal returns over the long term. Retail investors must approach ELSS funds with a long-term horizon. This allows the investment to ride through distinct market cycles and capitalise on the potential growth of equities. Avoiding frequent switches or redemptions based on short-term market fluctuation even helps to leverage the benefit of the compounding effect. This considerably boosts the overall returns.
Diversify across companies and sectors
Diversifying the investment portfolio throughout distinct companies and sectors can assist meet the risks associated with individual stock fluctuations. ELSS generally invest in a mix of small-cap, mid-cap, and large-cap stocks. A diversified portfolio reduces the dependency on just one company’s performance and ensures exposure to varied growth opportunities. However, careful selection and research of companies and sectors are essential to ensure the selected funds are in line with your life goals.
Assess periodically and consider portfolio rebalancing
Periodically monitoring the performance of the selected ELSS is crucial to evaluate their alignment with life goals. Periodic portfolio rebalancing allows the asset allocation to stay in alignment with the retail investor’s risk tolerance level and market conditions. While sticking to a long-term approach is essential, making well-informed adjustments depending on the changing dynamics of the market can optimise returns and help manage risk exposure.
ELSS offers retail investors an opportunity to make the most out of the potential of equities while enjoying tax deduction benefits. By following strategies such as SIP, diversification, remaining invested for a long time period and timely assessing and rebalancing, you can enhance your investments’ potential returns. Note that as investing involves risks, it is vital to line up your investment decisions with your financial goals and risk appetite. With a long-term perspective and careful planning, ELSS funds can serve as a prudent instrument in your journey towards tax optimisation and wealth creation.