How to Invest with an Equity Linked Savings Scheme

Equity Linked Savings Schemes (ELSS) are diversified equity schemes offered by mutual funds in India. They are known for their relatively short 3-year lock-in period. Because of their high liquidity and lucrative tax benefits, they’re considered one of the best tax-saving investment schemes around. By first choosing an investment scheme that’s right for your financial goals, and choosing a distributor to invest with, you can invest your own money in ELSS.

Part 1

Part 1 of 2:

Choosing the Right Investment Scheme

1
Invest in an ELSS with a low expense ratio. A fund’s expense ratio is essentially the amount of money that investors are charged by the fund management company for managing their investment. Choose a scheme with a low expense ratio to save money while investing.^{[1]XResearch source}
- Expense ratios vary widely from firm to firm. Research multiple management companies before determining which expense ratio is the lowest.
- You can calculate expense ratio by dividing expenses incurred by the fund by its Assets Under Management (AUM).
2
Use past performance and age to judge a fund’s quality. Although markets can be volatile, an ELSS fund’s future performance can often be predicted by analyzing its past performance. Invest in older funds with good performance records to better ensure the success of your investment.^{[2]XResearch source}
- Because markets are so unstable over time, older funds tend to have weathered more ups and downs than newer funds and thus tend to be more adept at surviving various market conditions.
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3
Choose the growth option to maximize your profits over time. There are 3 different options for investing in ELSS. The growth option does not yield dividends and instead re-invests all of the fund’s profits in the short-term, yielding a larger profit at the end of the ELSS tenure.^{[3]XResearch source}
- Because you won’t receive any of your investment’s dividends, your profits with this option will depend entirely on market conditions during the 3 or more years you leave your money in the ELSS.
- This option might be best for young people saving for retirement or for new parents saving money for their children’s education.
4
Opt for the dividend option to see immediate profits. Under this option, profits made by your ELSS are distributed to you on a timely basis instead of at the end of the investment tenure. Go with this option if you want your ELSS to supplement your regular income.^{[4]XResearch source}
- Note that the benefits accrued under this option are tax-exempt.
- This option is probably best for people who need a regular increase to their income in the short-term.
5
Go with a dividend reinvestment option to have more control. A middle path between the growth option and the dividend option is the dividend reinvestment option. This option will allow investors to choose whether or not to keep their dividends or return them to be reinvested in the ELSS.^{[5]XResearch source}
- This option may be best for market conditions that are not stable, as it allows you to keep money in a bear economy and reinvest it in a bull economy.
- This is also sometimes called a “growth-reinvestment option.”
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Part 2

Part 2 of 2:

Investing Your Money

This can be either a nationalized or a private bank. Just make sure whatever bank you choose offers ELSS accounts.
2
Work with a mutual fund distributor if you don’t want to do any work. You’ll need to select an intermediary to do your investing. A professional mutual fund distributor will do all of the work for you, making this the best option for those who want to minimize the amount of work they do for their ELSS.^{[6]XResearch source}
- Mutual fund distributors will earn their commission from the fund house.
- Note that by working with a mutual fund distributor, you lose much of your ability to choose how your money is invested.
3
Use an online distributor to be more involved in your ELSS. Online distributors offer a variety of plans that will give you more options for retaining control over your investments and staying up-to-date on your ELSS. Choose this option if you’d rather take more personal responsibility for your investment.^{[7]XResearch source}
- Be advised that most online distributors charge a fee for each transaction.
4
Deposit your money in a lump sum to kick start your investing. If you have a lot of money you want to invest right away, you might consider depositing it in your ELSS in a lump sum. This will kick start your investment returns immediately, while also freeing you from having to think about your ELSS every month.^{[8]XResearch source}
- This option may be best for people starting out with a lump sum of money who can't rely on a regular income as a source of investment money.
- Note that most experts generally advise against this.
5
Invest with a Systematic Investment Plan to save money long-term. Using a Systematic Investment Plan (SIP) will spread out your investments and place money in your ELSS on a monthly basis. SIP averages out the cost of your investments over the year, thus making sure that you’re getting the best price possible.^{[9]XResearch source}
- For example, if costs are higher in February and lower in April, you will save money in the long-term by investing a little each month than if you invest all of your money in February or whenever costs are high.
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Tips

Equity Linked Savings Schemes are distinguished by their short 3-year lock-in period. However, to maximize your savings, plan to stay invested in your ELSS scheme far beyond those first 3 years.
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