4 Things To Know Before Starting An ELSS SIP

  Author: Kundan Kishore

Some of us are aware of the various advantages of systematic investment plans (SIPs) offered by mutual funds. Among other things, they help you invest regularly, say, every month.

While you can have an SIP for any kind of mutual fund, an SIP in an ELSS comes with an additional advantage. ELSS being a tax-saving equity mutual fund, which provides annual tax deductions for investments upto Rs 1.5 lakh under Section 80C, SIPs in them allow you to do your tax saving investments every month. However, before you get started with an SIP in an ELSS, you need to know about 4 important things.

Select the scheme carefully Compare ELSS schemes, especially their performance, compared to their benchmarks and other ELSS over one-, three- and five—years. You can visit website of mutual fund houses and other credible players and use online comparison tools.

Here, it is worthwhile pointing out that you need to earmark a financial goal such as children’s higher education or retirement for your ELSS investment for which you enrolling in the SIP. 

Choose an appropriate SIP date You should choose the SIP date carefully. Ensure that the date is such that the money is available in your bank account on the SIP date. Otherwise, the bank may charge a penalty.

Know about SIP period Typically people get confused about lock in period and SIP period of an ELSS. Remember, ELSS has a lock-in period of three years when you don’t have access to your money.

You need not to do an SIP for three years, as many people mistakenly do.  Only SIP investments made in a financial year is considered for tax deduction. For instance, if you start a SIP of Rs 5,000 for three years in September 2016, you can avail the tax deduction of Rs 35,000 or the amount equivalent to seven monthly investments.

Lock-in period In the case of ELSS SIP, each investment or SIP instalment, is treated as a separate investment, and has a three-year lock-in period. So, if you started investing in ELSS through SIP in April 2016, you can redeem the units bought in the first instalment only in April 2019. Those units bought in May 2016 can be redeemed only in May 2019, and so on.

A disciplined approach to tax saving investments all through the year is crucial in avoiding last minute panic investments. SIPs in ELSS go a long way in helping you do that.

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