Equity Linked Saving Scheme is an open ended mutual fund scheme that comes with a tax benefit. Several Indian investors are shifting from traditional tax saving schemes to ELSS because apart from tax benefit it also gives investors an opportunity to seek capital appreciation over the long term. It is essential for taxpayers to include tax planning while building a financial plan. A lot of financial advisors would agree on the fact that tax planning and financial planning go hand in hand. There’s no point in letting the government take away your hard earned money. Young earners generally turn a blind eye on tax saving instruments only to make rushed investment decisions at the end of the fiscal year when they receive an email from the HR to submit tax proof.
If you want to save tax and at the same time earn long term capital appreciation then you can start investing systematically in ELSS via SIP. A Systematic Investment Plan is a modern way to invest in a tax saving scheme like ELSS. With SIP, all you have to do is complete a one time mandate following which every month on a fixed date a predetermined sum is debited from your savings account and electronically transferred to your tax saver fund. Because ELSS has a three year lock in period, there is a good chance you not only save tax but also generate income through long term equity investment.
ELSS is a mutual fund scheme that invests a statutory lock in a period of three years. This means that investors cannot redeem their ELSS units for a minimum period of 36 months from the date of investment.
Here’s an example of how ELSS can help you save tax:
Dinesh Jain is a Senior Project Manager with an IT company grossing an annual salary of Rs. 12.5 lakhs. He has been investing in traditional tax saving instruments for a many years now but did not benefit much because these consecutive schemes offered low interest rates. After learning about ELSS and it’s tax saving feature, Dinesh invested Rs. 1.5 lakhs in this tax saving scheme. As per Section 80C of the Indian Income Tax Act, 1961 one can invest upto Rs. 1.5 lakhs annually in ELSS and claim tax deduction for the same. By investing in ELSS Dinesh has brought down his tax liability.
Investing in ELSS has its own perks. But here are 5 mistakes we should avoid while investing in ELSS:
- Invest only for 3 years
Although ELSS comes with a 3 year lock in period this doesn’t mean that investors should only remain invested in the mutual fund scheme for a period of 36 months. If the equity scheme is giving positive returns, one can remain invested till their investment objective is achieved.
- Invest only Rs. 1.5 lakhs
ELSS doesn’t have an upper limit. This means investors can invest depending on their investment objective and their risk appetite. One cannot claim tax benefit for investments more than worth Rs. 1.5 lakhs but they can invest more if they want to seek higher capital gains.
- Invest beyond risk appetite
One should not invest in ELSS without determining their risk appetite. ELSS predominantly invests in equity related instruments and thus carries a high risk profile. One should only invest if they are able to bear the risks that come with ELSS investments.
- Invest for short term
Equity oriented schemes are highly volatile in nature. One may even witness losses in their ELSS portfolio over the short term. But if you really want to witness the true potential of an equity fund like ELSS then you need to remain invested for at least 5 years.
- Make a lump sum investment
If you make a one-time payment then you will be depriving yourself from the power of compounding. Compounding in mutual funds means interest earned on the interest earned from the principal amount. When you invest in ELSS via SIP, you are systematically building a corpus. The interest earned by the scheme is invested back in the fund. In the long run your small SIP investments stand a chance of multiplying and turning into a big corpus. This may not happen if you make a lump sum investment.
ELSS offers capital appreciation over the long term but investors should avoid the above mistakes to assure that their investment journey continues flawlessly.