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Investing in an equity-linked savings scheme (ELSS) is a simple process. You can sign up for this tax-saving mutual fund scheme on your own. Or you could invest in ELSS through your broker. ELSS investment is no different than buying units in other mutual fund products.

(Read more: How to buy and sell mutual funds )

Here is a step-by-step guide explaining how to invest in ELSS:

Step 1: Select investment approach

There are three choices available to ELSS investors.

a. Use your demat or trading account to place an order.

b. Ask your broker to buy mutual fund units on your behalf.

c. Buy from the asset management company (AMC) or the bank that sells mutual funds.

Investing in ELSS through a brokerage house like Kotak Securities brings certain advantages. First, you save on time by doing less paperwork. Second, the brokerage firm can provide valuable tips to help you choose the fund which suits you the most.

Step 2: Apply for demat account

To open a demat account , contact a depository participant (DP). They will provide you with an account-opening form. Fill this up and submit your proofs of identity and address. That will include your passport-sized photographs and photocopies of some basic documents. You will then need to sign an agreement with the DP, following which you will get an account number. All your purchases and investments will be carried out through this account. You can open as many demat accounts as you need.

Step 3: Choose an ELSS fund

Once your demat account is opened and functional, log in to your account. Now, go to the ‘Mutual Funds’ section of your broker’s homepage. Click on ‘Place order’. This should bring up the whole list of ELSS products available in the market. It is time to make a selection. However, make sure to research the different options before making your choice. Call your broker if you need help with technical aspects such as navigating the website and placing your order.

Step 4: Add investment details

Specify the amount you wish to invest in the ELSS. As a mutual fund investor, you have two choices:

1. You could opt for a systematic investment plan (SIP). Specify how much you would like to invest every month and for how many months.

2. Make a lump-sum investment. Here, you invest the full amount at one go.

(Read more: What is an SIP ?)

Step 6: Pick a pay-out preference

If the scheme you have chosen pays dividends, select one of the two dividend options: pay-out or reinvestment. Here is how the two options work:

  • In the pay-out option, the dividends are credited to your bank account.
  • With the reinvestment option, the dividends are used to buy more units under the ELSS scheme. In this case, the dividends will not be credited to your bank account.

Select the former if you want a secondary source of income. The reinvestment option helps you increase the size of your holdings and increases returns.

(Read more: Ways to buy mutual funds )

Choosing the right ELSS

Now that you know how to invest in ELSS, let’s move on to the next step. When you start looking to invest in ELSS, you will find a plethora of choices. Almost all the 45-odd fund houses have one or more ELSSs in their bouquet.

Choosing a fund that matches your risk profile is the most difficult part. You have to understand the investment pattern that a particular ELSS has adopted. There is a small catch here. Like other mutual fund schemes, ELSS as a category does not specify where it is investing. Their investments could be in large-caps, mid–caps, multi-caps, or even in small-caps. But most ELSS schemes adopt a balanced approach that is tuned to market conditions. Here are a few tricks that might help you in choosing the right ELSS product:

1. Match your risk profile with the fund’s investment pattern.

2. Do not rely on the performance of the fund alone. It may not work for you.

For example, an ELSS could have overexposure to mid-caps. This could become risky during a bearish phase in the market. Your risk profile may not stomach such volatility. In that case, you should not opt for that particular scheme even if it may have fared well in the past.

3. Consider the expense ratio before selecting the ELSS. Expense ratio is the annual fee that all mutual funds charge investors. If the expense ratio is high, your returns will take a hit.

4. Restrict the number of ELSSs in your portfolio. Moreover, apart from ELSS, you might have invested in diversified equity funds. There is no point in having more of the same as it may lead to an overlap.

5. For those who have already invested in ELSS, it is worth running a check on the performance of the funds in the portfolio. If the minimum lock-in period of three years is over and the fund is not doing too well, it is time to exit.

6. ELSS plans are excellent wealth creators in the long term. If a fund is doing well and even if the minimum lock-in period is over, stay invested in it as long as you can.

(Read more: How to choose a mutual fund scheme ?)

ELSS schemes reduce your tax burden by up to Rs 1.5 lakh a year. From 2018 onwards, returns from ELSS have attracted a 10% tax if the capital gains are more than Rs 1 lakh. Together with the lowest lock-in period and potential to give the highest returns among its peers in the Section 80C basket, ELSS is the clear favourite among investors. You can set aside as little as Rs 500 every month to begin an SIP to start investing in ELSS.

WHAT NEXT?

We are almost at the end. Before you start investing in mutual funds, there are a few more important points to keep in mind like taxation. This can affect your total financial returns. To know about these factors, target="_new" style="color:#1f66b2;">Click here

Why Capital gains report?
  • Snapshot of profit/loss
  • Reflects performance of your portfolio
  • Helps compute taxes
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