Topic 3: 5 Common Myths Regarding ELSS
Any type of financial investment needs proper planning and ELSS (Equity Linked Savings Scheme) investments are no different. The ELSS is considered by many as one of the top tax saving investment options due to its short lock-in period and potentially high ROI. As per historical records, ELSS tax saver mutual funds have outperformed every other tax saving option available in India. No wonder the interest in this tax saving option is growing by the day!
However, despite the increase in investments and interest in ELSS schemes, these are various myths associated with them and this is the key reason why some investors still view them with a degree of skepticism. The following a list of 5 common myths associated with these funds that just aren’t true.
High Entry Load and Fund Management Charges:
Mutual funds used to have a high entry load as an upfront fee which was charged by the mutual fund company on the initial investment. However, entry loads were abolished in 2009 though most equity-related mutual funds still have an exit load if liquidated before a 1 year period. However, in the case of ELSS funds, such loads or redemption charges are not applicable as these funds have a lock-in period of 3 years, to begin with. In the case of fund management fees, these too are capped at 2.25% by law. Moreover, there are 3rd parties, who do not charge a portfolio management fees that some others may do.
Only Suitable for Short-Term Investments:
Investors often believe (wrongly!) that having a shorter lock-in period means that the fund cannot offer long-term capital appreciation benefits. Thankfully, nothing can be further from the truth. A shorter lock-in period means that you can withdraw your investments after the minimum lock-in period of three years but if you want to, you can extend your investment indefinitely beyond this lock-in period. If you invest in a mutual fund for a longer period the possibility of higher returns increases substantially.
It is too Complex to Understand and Invest In:
Investing in an ELSS is as simple as any other mutual fund. It allows you to choose the market segments where you want to invest. You can also allocate the corpus as per your preferences and understanding. However, most investors leave this task to their fund managers as they usually have far more experience and a better understanding of market conditions and risks to choose how much to invest in what category.
ELSS is short for Equity Linked Savings Scheme and when people hear “equity”, they think of shares and DEMAT accounts and so on. This tends to detract from many people, however, ELSS mutual funds are not the same as shares. Agreed they are market linked and the value of units changes daily as per market movement, but apart from that, ELSS funds are managed professionally by fund managers who have decades of experience, so you don’t have to worry about the complexity of the stock market to invest in ELSS funds.
Good for Investment but not Good for Tax Savings:
This is one of the most popular (and of course false!) myths about ELSS. These funds are excellent tax saving instruments. Unlike the NSC and tax saving FDs, the principal investment, the capital gains and maturity amount are all completely tax-free. Add to this the short lock-in period of 3 years (min. among tax savings investments) as well as the fact that ELSS tax saver funds have outperformed all other options in the category and you have a winning combination that is impossible to beat.
High Minimum Investment Limit:
This myth is probably the worst of them all. ELSS has a minimum threshold of Rs. 500 only. This makes it a smart investment option for people who want to test its effectiveness by putting in small sums before making larger investments later on if they choose to do so. Thus this investment option provides investors with a degree of flexibility, which is unheard of in case of most other tax savings investments.
Source: paisabazaar.com
However, despite the increase in investments and interest in ELSS schemes, these are various myths associated with them and this is the key reason why some investors still view them with a degree of skepticism. The following a list of 5 common myths associated with these funds that just aren’t true.
High Entry Load and Fund Management Charges:
Mutual funds used to have a high entry load as an upfront fee which was charged by the mutual fund company on the initial investment. However, entry loads were abolished in 2009 though most equity-related mutual funds still have an exit load if liquidated before a 1 year period. However, in the case of ELSS funds, such loads or redemption charges are not applicable as these funds have a lock-in period of 3 years, to begin with. In the case of fund management fees, these too are capped at 2.25% by law. Moreover, there are 3rd parties, who do not charge a portfolio management fees that some others may do.
Only Suitable for Short-Term Investments:
Investors often believe (wrongly!) that having a shorter lock-in period means that the fund cannot offer long-term capital appreciation benefits. Thankfully, nothing can be further from the truth. A shorter lock-in period means that you can withdraw your investments after the minimum lock-in period of three years but if you want to, you can extend your investment indefinitely beyond this lock-in period. If you invest in a mutual fund for a longer period the possibility of higher returns increases substantially.
It is too Complex to Understand and Invest In:
Investing in an ELSS is as simple as any other mutual fund. It allows you to choose the market segments where you want to invest. You can also allocate the corpus as per your preferences and understanding. However, most investors leave this task to their fund managers as they usually have far more experience and a better understanding of market conditions and risks to choose how much to invest in what category.
ELSS is short for Equity Linked Savings Scheme and when people hear “equity”, they think of shares and DEMAT accounts and so on. This tends to detract from many people, however, ELSS mutual funds are not the same as shares. Agreed they are market linked and the value of units changes daily as per market movement, but apart from that, ELSS funds are managed professionally by fund managers who have decades of experience, so you don’t have to worry about the complexity of the stock market to invest in ELSS funds.
Good for Investment but not Good for Tax Savings:
This is one of the most popular (and of course false!) myths about ELSS. These funds are excellent tax saving instruments. Unlike the NSC and tax saving FDs, the principal investment, the capital gains and maturity amount are all completely tax-free. Add to this the short lock-in period of 3 years (min. among tax savings investments) as well as the fact that ELSS tax saver funds have outperformed all other options in the category and you have a winning combination that is impossible to beat.
High Minimum Investment Limit:
This myth is probably the worst of them all. ELSS has a minimum threshold of Rs. 500 only. This makes it a smart investment option for people who want to test its effectiveness by putting in small sums before making larger investments later on if they choose to do so. Thus this investment option provides investors with a degree of flexibility, which is unheard of in case of most other tax savings investments.
Source: paisabazaar.com