Illustrated below are the steps for how to invest in ELSS:
- Step 1: Determine Your Tax Slab and Taxable Income
It is imperative that investors are aware of the tax slab applicable to their income. Moreover, they must calculate their taxable income. Based on these factors, one can choose an ELSS mutual fund that fulfils their specific requirements.
- Step 2: Choose an Appropriate ELSS
In order to choose an ELSS suitable for you, evaluate the following points:
Past Performance of a Fund - It is of utmost importance that investors check a fund’s past performance before investing. That said, one must note that past performance is not an indicator of future returns. Instead, it only gives one a fundamental idea of probable returns.
Experience of the Fund Manager - Another critical point to evaluate before investing is the experience of a fund manager. It indicates how a fund manager generated returns by navigating the fund through market fluctuations over the years.
Risk Appetite - Like any other mutual fund, investment in ELSS involves risk. Therefore, potential investors must ascertain their risk appetite and the ability to digest losses, if any.
Investment Horizon - It is wise to not view mutual fund investments from a short-term perspective. Rather, one should keep his/her investment horizon longer and be patient to earn significant returns.
Moreover, one should be prepared to stay invested in a SIP for a minimum of 6 to 8 years. According to financial experts, this is the timeframe within which investors will recover any short-term equity losses.
- Step 3: Deciding Between Lumpsum and SIP
Mutual fund investors are often in a dilemma when it comes to choosing between lumpsum and SIP. However, for an ELSS fund investment, an SIP is often preferred as it helps one average the buying cost per unit. Besides, a lumpsum equity investment can be risky when the market is high.