The contours of equity-linked saving schemes

Thanks to the recent increase in the investment limit under Sec 80C to ₹1.5 lakh, equity-linked savings schemes (ELSS) will now jostle for a larger share of your investment pie, along with instruments such as the PPF, NSC and five-year bank fixed deposits.

It depends on how much risk you are willing to take and which stage of life you are currently in. While other investment options under Section 80C give assured returns, the performance of ELSS is linked to the vagaries of the stock market. Hence, go for ELSS only if you have a high risk appetite.

As a thumb rule, those in the early or mid-stages of their career can park a portion of their surplus income in ELSS.

These investments are best avoided by senior citizens or those who are about to retire. Here, capital protection should take priority over generating higher returns.

If you have invested in ELSS in the past, check if your current debt-equity mix allows you to take on additional risk before you make up your mind to further invest in ELSS.

ELSS has the shortest lock-in period among the instruments that qualify for tax exemption under Section 80 C.

Investments here are locked in only for three years.

A lumpsum investment is more convenient than a systematic plan (SIP) as every year’s investment can be fully withdrawn three years from the date of allotment. This will help you meet any financial need that may arise, going forward.

If you opt for a SIP, each instalment has a lock-in of three years. However, a systematic investment can help you average out the purchase cost in a volatile market.

Strictly speaking, you needn’t withdraw the money after three years. Depending on its performance, you can either stay invested, or switch to other diversified funds. Your investment is locked in for three years, but should you need some cash flows even before that, you can go for the dividend payout option. Having said that, there is no guarantee that the fund will pay dividends at regular intervals. Dividends received, though, are tax-exempt.

If you don’t require income from the investment in the interim, you could choose the growth option. A rally in the prices of underlying stocks can boost your fund’s NAV. But if you expect the market to remain turbulent, the dividend option will suit you better.

The dividend reinvestment option in ELSS schemes is best avoided. Dividends declared by the fund are reinvested by a fresh purchase of units. Though you are allowed to claim a deduction under Section 80C to the extent of fresh purchase during the year, your investment will be locked for three years from the date of fresh purchase.

Use the same criteria for diversified funds: track record, investment mandate, steadiness in performance and earnings potential for the sectors and stocks currently owned.

Long-term capital gains arising from sale of units (after lock-in) is tax-exempt. While the minimum investment is pegged in most cases at ₹500, there is no cap on the maximum amount that can be invested.

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