Learn how to invest in ELSS through SIP and you get the dual benefits of savings on income tax as well as higher returns on investment. Lock-in period of ELSS is not very long is another added advantage.
As the financial year nears its end, every individual or investor starts looking for tax saving options. An option which can yield handsome returns along with primary requirement of saving tax.
There are several options available in the market which are commonly used by people. Most popular are Public Provident Fund (PPF), Life Insurance Corporation (LIC) Policies, National Savings Certificate (NSC) or Unit Linked Insurance Plans (ULIP)
Although, these are quite popular but there are some disadvantages of their own with them. PPF’s and NSC’s have a long lock-in period, ranging from 8-15 years.
The returns produced by them fail to beat lifestyle inflation in the long run. So the real returns are not sufficient to meet our day-to-day expenses.
ULIP’s have the potential to beat the inflation but they are quite costly. They also require long term investment for 15-20 years to yield those gains.So what is the best option?
There are tax saving options in mutual funds too. Equity Linked Savings Scheme or ELSS is such an option. It can be quite useful to our dual demands of tax savings as well as higher returns.
Let us understand what is an ELSS and how to invest in ELSS?
Equity Linked Savings Scheme (ELSS)
ELSS is a Mutual Fund investment scheme which also gives the advantage of tax saving. Due to equity exposure,the ELSS provides the return which can beat the inflation in terms of returns over investment.
Returns beating the inflation, we mean to say the real returns are what we get after subtracting the inflation rate from the returns we get.
Usual prevailing inflation rate in an economy are near 5%. If your investment is yielding you returns of 8% annually, the actual return you are getting is 8 – 5 = 3%. A return of 3% can never be considered sufficient to meet our future expenses.
It is well known fact that equities are best placed to give inflation beating returns. A conservative return expected from equities in the longer run is 15%. After subtracting inflation we get 10% return.
Advantages of investing in ELSS
If you invest in ELSS, you get several advantages as compared to other tax saving options. Let us have a look :
Of course, the risk involved with markets is always there when you invest in ELSS. Choosing a good fund with good track record and little longer period of investment can minimize that risk.
In the long run, ELSS is capable of fairing far better than other mentioned tax saving options.
Second advantage with ELSS is that it has a lock-in period of 3 years only. It is small as compared to longer period in PPF & NSC. In fact this is the shortest lock-in period. ELSS is a type of Systematic Investment Plan (SIP)
Equity Linked Savings Scheme involves investing in a Tax Saving mutual fund scheme on regular intervals.
If you opt for five years ELSS on monthly basis, depositing your fixed amount every month, you can withdraw the monthly deposited amount after three years and not the whole amount invested in three years. All in all, you have to keep every instalment for three years in the fund.
Another privilege with ELSS is that you need not to invest the whole amount in lump sum basis. You can start investing in ELSS in installments from the start of the new financial year.
You can calculate the total amount you need to save for tax saving. Then divide it into 12 equal installments for the 12 months. You can invest this amount in ELSS on monthly basis.
Savings under Equity Linked Savings Scheme is exempted under section 80-C of Indian Income Tax. You need to keep your money in this scheme for a minimum of 3 years (lock in period).
As per current rules, after the first year of investment you become eligible for Long Term Capital Gains which is not tax free.
Power of ELSS
Below is the screen shot of top performing Tax Saving Equity Linked Savings Scheme Funds, taken from www.icicidirect.com on January 2015.
The % returns produced by the funds for the time period of 3 months, 1 year and 3 year are shown.
How to Invest in ELSS Through SIP?
To invest in ELSS mutual fund scheme, you need to visit a CAMS office or any bank. CAMS is a Computer Age Management Services organization which manages the mutual funds.
You would need to provide three things to them to invest in ELSS :
- A KYC or Know Your Client form for verification purposes.
- An ELSS fund scheme in which you want to make investment. Those people can also suggest you some schemes to invest in ELSS. But it is better if you do your homework a little bit and tell them the scheme where you want to invest in.
- A savings bank account from which the money will be taken and invested. The amount will be automatically withdrawn from your savings account and invested in ELSS at each investment date.
Equity Linked Savings Scheme or ELSS can do wonders for you if :
- You have a conservative risk profile
- You want to save tax on your incomes
- You are willing to give a little longer time than lock-in period to your investment
- You choose carefully a good mutual fund scheme.