How to Invest in ELSS Funds: A Step-by-Step Process

Investing in Equity Linked Savings Schemes (ELSS) presents an opportunity for individuals to achieve both wealth creation and tax benefits. ELSS are a specific type of mutual fund primarily investing in equity and equity-related instruments. They are distinct because they are the only mutual funds eligible for tax deductions under Section 80C of the Income Tax Act in India. This dual advantage makes ELSS a popular choice for those looking to potentially grow their capital while also reducing their taxable income by up to ₹1.5 lakh annually.

Preparing for ELSS Investment

Before initiating an ELSS investment, several preparatory steps are necessary to ensure a smooth process. A Permanent Account Number (PAN) card is a fundamental requirement for all financial transactions in India, including mutual fund investments. This unique 10-digit alphanumeric identifier serves as a primary identification document. Without a valid PAN, mutual fund transactions will be rejected.

Know Your Customer (KYC) compliance is another mandatory step for investing in mutual funds. KYC involves verifying an investor’s identity and address to comply with regulatory requirements. The process can be completed both online and offline. Online eKYC typically involves Aadhaar-based verification, where details are electronically verified using an Aadhaar number. For offline KYC, individuals submit a completed KYC form along with self-attested copies of identity and address proof to a KYC Registration Agency (KRA) or mutual fund service center.

A valid bank account is essential for both investing funds and receiving redemption proceeds. This registered bank account ensures that all financial flows related to your ELSS investment are routed securely. It is crucial to have this account linked to your investment folio for seamless transactions.

Adding a nominee to your mutual fund investment is an important step to ensure a smooth transfer of assets in case of an unforeseen event. It is highly advisable for the protection of your financial assets. Nomination details are typically provided in the application form or through a separate nomination form.

Choosing an Investment Approach

When investing in ELSS funds, individuals generally have two primary methods to consider: Systematic Investment Plan (SIP) and Lumpsum investment. Each approach offers distinct characteristics regarding how funds are deployed and how the mandatory lock-in period is applied.

A Systematic Investment Plan (SIP) involves making regular, fixed investments at predetermined intervals. This disciplined approach allows investors to average out the cost of units over time. For ELSS funds, each individual SIP installment is treated as a fresh investment.

Conversely, a Lumpsum investment involves a single, one-time investment of a larger sum. This method is often chosen when an investor has a significant amount of capital available.

Executing Your ELSS Investment

Once all preparatory requirements, such as a PAN card, KYC compliance, and a bank account, are in place, individuals can proceed with the actual investment. The process of executing an ELSS investment can be done through either online or offline channels.

For online investment, investors can directly visit the website of an Asset Management Company (AMC) offering ELSS funds. After registering and creating an account, they can select the desired ELSS fund, specify the investment amount, and choose their preferred investment approach. Payment is typically facilitated through net banking or Unified Payments Interface (UPI) directly from the registered bank account. Various online investment platforms and brokers also provide a streamlined interface for investing in ELSS funds across multiple AMCs.

Offline investment options remain available for those who prefer a more traditional approach. One common method is to invest through a mutual fund distributor. This involves filling out physical application forms, specifying the ELSS fund and investment amount, and submitting the form along with necessary documents and payment via cheque or demand draft. Another offline avenue is to visit the branches of Asset Management Companies or the offices of their Registrar and Transfer Agents (RTAs). After successfully executing the investment, investors typically receive a confirmation.

Understanding ELSS Investment Timelines

A defining characteristic of ELSS funds is their mandatory lock-in period. ELSS funds have the shortest lock-in period among tax-saving instruments under Section 80C, set at three years. During this 3-year duration, investors cannot redeem or withdraw their investments.

The calculation of this lock-in period depends on the chosen investment approach. For a lumpsum investment, the entire amount is locked in for three years from the exact date of investment. For investments made through a Systematic Investment Plan (SIP), each individual SIP installment is considered a separate investment. The 3-year lock-in period applies independently to each installment, starting from its respective investment date.

Once the mandatory 3-year lock-in period is complete, investors have the flexibility to redeem their ELSS units. The redemption process can be initiated online or offline. For online redemption, investors can log into their mutual fund account on the AMC’s website or the investment platform used for purchase. They navigate to the ‘Redeem’ or ‘Withdraw’ section, select the ELSS fund, and specify the number of units or the amount they wish to redeem.

Offline redemption involves filling out a redemption request form. This form requires details such as the folio number, scheme name, and the amount or units to be redeemed, along with a signature. The completed form is then submitted to the AMC or its registrar. After a redemption request is processed, the funds are typically credited to the investor’s registered bank account within a few business days.