How to evaluate the performance of your ELSS fund investment?

Under Section 80 C, a taxpayer can avail a tax deduction of up to Rs 1.50 lakh annually, which helps in lowering the tax burden. Crucial financial instruments that qualify for a tax deduction as per Section 80 C include bank fixed deposit, ULIP (unit-linked insurance plan), NPS (national pension scheme), ELSS (equity-linked savings scheme), etc. However, out of all the above-mentioned financial instruments, ELSS is highly known as it comes with the shortest lock-in period of just three years. Being an equity-linked option, it has a past record of offering inflation-beating and higher returns than fixed-income instruments over the long term.

As you must hold your ELSS investment for at least three years period to get the tax benefit as per Section 80 C, here any capital gain on the sale of the units is considered as LTCG (long-term capital gains), which attracts a tax rate of 10 per cent on gains of over Rs 1 lakh. Note that an LTCG of up to Rs 1 lakh attracts no tax. Additionally, SIP (Systematic Investment Plan) mode is a recommended route to begin with your ELSS investment. This is a predominant mode for generating high returns owing to the rupee cost averaging feature, compounding effect, and requirement for low initial market investment. However, investing in ELSS investment is not enough to reap the benefits of high returns. You must also ensure to periodically review the returns on your ELSS investment to know if you are on the right track. Read on to know how you can evaluate the performance of your ELSS investment.

How to assess the performance of your ELSS investment?

Just looking at your ELSS scheme’s performance is meaningless. For assessing your ELSS scheme properly, you must ensure to compare the scheme with its peer funds and benchmark indices. If your ELSS investment manages to overcome its benchmark indices and peer funds, then this means the scheme is performing well. In the case your ELSS scheme underperforms, then you must ensure to take note of the same.

If the underperformance of the fund is for a short span, you do not need to bother much. But if it adversely underperforms both its peer funds and benchmark indices for over a year, you may consider redeeming the units and reinvesting the funds in a better-performing ELSS.

Is it mandatory for you to liquidate your funds from ELSS after three years?

No, it is not mandatory to liquidate your funds from your tax-saving investment on completion of the three-year lock-in. You get the choice to liquidate when you want to. However, note that if you redeem your ELSS investment three years before, then you will not get the tax benefits as per Section 80 C.

As mentioned above, equity fund redemption after a year is categorised as LTCG, which attracts an LTCG tax of 10 per cent on gains of over Rs 1 lakh and on up to Rs 1 lakh, you are charged no tax. Redemption of the ELSS scheme within a year attracts STCG (short-term capital gains) of flat 15 per cent regardless of your tax slab.

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