Investment in ELSS mutual funds is mostly driven by the tax saving. However, you deserve the best scheme and best return from this investment. The scheme should not snatch your peace of mind. The ELSS should not charge higher expenses. Rather, investment in ELSS should fulfill your dreams. In this post, I will guide through the investment steps of equity linked saving schemes. You would know how to invest in ELSS funds. You have to go through the following steps to get maximum profit from your ELSS investment.
1. Select Best Tax Saving Mutual Fund
Choosing best tax saving mutual fund is the most crucial part. There is high variation among the tax saving mutual funds. The return can be totally different of different ELSS funds. During the last three years the top performing mutual fund, the Escorts Tax Plan fund has given 31% annualized return, whereas bottom fund, the Union Tax Saver fund has given only 14% annualized return. If you have invested Rs 10,000 in both the Escorts Tax Plan and Union Tax Saver fund, the Escorts would have given you Rs 22,200 and Union tax saver Rs 14,400.
Definitely you will prefer the best mutual fund. Therefore, your first step of investment in tax saving mutual fund should be the selection of best fund (ELSS). Note, a best mutual fund is not the top performing fund only, but it should have other qualities of best ELSS mutual fund. Such as, your selected fund should not be too volatile. The fund manager of the best ELSS mutual fund should be consistent. The AUM of ELSS should be more than Rs 1000 Cr. The fund management company should be reputed.
2. Choose Direct Plan
Each ELSS mutual fund has two plans to subscribe. The regular plan is the traditional plan. It charges a higher ‘expense ratio’ every year because of the payment to the mutual fund distributor. The Direct plan has started few years back. It charges low ‘expense ratio’ every year, as it does not pay commission to the mutual fund distributors.
Both the plans of ELSS mutual funds have different NAV. The Direct plan always gives better returns than the regular plan. You should always try to prefer the direct plan.
Suppose you had invested Rs 10,000 in direct plan and regular plan of Axis long term equity on 1st January 2013. The Rs 10,000 invested in Axis long term equity direct plan would have become Rs 22,590 on 28/01/2017. Whereas the same amount invested in Axis long term equity regular plan would have become Rs 21,670. The direct plan has given ₹920 more return in 4 years. This gap widens with every passing year.
3. Select Suitable Intermediary
After choosing the best tax saving mutual fund you need to find the suitable intermediary. The investment in ELSS mutual funds is primarily done through the intermediaries. However, the mutual fund companies also take the investment directly.
Investment Through the Mutual Fund Distributor
You can find mutual fund distributors in every corner of India. These mutual fund distributors do the paperwork and invest on your behalf. You can give them cash or cheque. The mutual fund distributors don’t take any extra money from you. Rather, they get the commission from the mutual fund company. The mutual fund distributors don’t sell the direct plan of mutual fund schemes. as, they don’t get commission by selling the ‘Direct’ plans.
Take extra care while you buy a mutual fund scheme through the mutual fund distributor. You must decide the ELSS mutual fund before contacting to the distributor. Sometimes, distributor push for the specific ELSS. The ELSS may be most beneficial for the distributor, not for you.
Investment Through Online Distributor
The online share trading companies such as ICICIDirect, HDFC securities, Kotak securities, Sharekhan and India Infoline also sell the mutual fund schemes. You can buy any ELSS mutual fund from these online distributors. Tracking the ELSS performance is also very easy through these online distributors. You can track your mutual fund investment along with the share investment. The online distributors don’t sell the direct mutual fund schemes. Rather, they charge extra fees for providing online platform. This fees may be upto Rs 100 per transaction.
There are some independent online mutual fund distributors as well. They also give you the ease of online investment and portfolio tracking, but you can’t buy the direct mutual fund units. These distributors do not charge extra. Examples are fundsindia.com, myuniverse.co.in and scripbox.com
There are some mutual fund platforms which provides direct plan of mutual funds. However, They can charge extra fees, e. g. MF Utility, MyCAMS, Invezta, ORO wealth. Among these MyCAMS don’t charge fees but it provide only those mutual funds which are serviced by it.
Mutual fund companies accept the direct subscription as well. You can visit a mutual fund office to invest in the mutual fund scheme of that company. However, In this process, you need to visit different fund houses to invest in ELSS mutual funds of different companies. But investment through the fund houses give you the option to invest in ‘direct plan’ of tax saving mutual funds. You can also invest online through the mutual fund company websites. However, you may be asked to send the KYC documents through the post. Once, you send the KYC document, further you can easily invest online.
4. Lump Sum or SIP Investment?
We always get confused between SIP or lump sum investment. The financial planners always suggest for the SIP. Whereas common sense says for the lump sum to encash the opportunity. The dilemma may serious for the regular mutual fund investment, but for an ELSS, you should always prefer the SIP. These are the 5 reasons behind this preference.
- You need to invest a fixed sum for the tax saving purpose. You can’t postpone your ELSS investment, waiting for the best time.
- You can easily achieve the target of ELSS investment. For maximum tax saving, you must invest the desired amount.
- You will enjoy the benefit of averaging.
- You will not repent for the missed opportunity.
- A big amount would not be locked with an ELSS, in case you choose a wrong scheme initially.
5. Redemption of ELSS Funds
You can’t redeem the investment in ELSS funds soon. As, Your money gets locked for three years. After 3 years, you can get your money back any time. Unlike the PPF, every subsequent investment in an ELSS gets locked for 3 years. If you use SIP method to invest in ELSS, every investment has its own lock in period of 3 y ears.
To redeem the units of ELSS mutual funds, you have to fill a small redemption form. If you have gone through the mutual fund distributor, He will take care of the formalities. The money will be deposited in your account within 3 trading days.
If you have gone through the online distributors, A redemption order is enough the get the money back. The money would be credited into your account.
If you have invested through the websites of mutual fund companies, you must log in into your account at the website. You can give redemption orders through the website itself.
Systematic Withdrawal Plan
If you have chosen the SIP method of investment, all of your investment will not be available for redemption after 3 years. In this scenario, either you need to redeem the investment multiple times or wait for another 3 years.
The solution of this hassle is the systematic withdrawal plan. Similar to the SIP for purchase, you can adopt SWP for the withdrawal. You can fix an amount or units for the regular withdrawals. You need not to fill the form or give order for every month. A single mandate would be enough for monthly redemption. The portals of mutual fund companies and online distributors give this facility.
With the online facilities, Investing in ELSS mutual funds has become very easy. I will suggest you to opt for the direct plan. You can earn extra thousands through the direct plan. The mutual fund company may ask for the KYC documents but it is a one-time exercise.