Invest in an ELSS mutual fund the SIP way

If you were given bonus points to travel to your favourite destination anytime in the next year, would you grab it today or would you refuse and prefer to evaluate travel deals only when you are closer to your travel dates? The most common reaction would be to take the bonus points and travel whenever possible. Tax planning is somewhat similar. If you do it in advance and in a timely manner, it can fit very well with your financial plan. If you wait till the end of the year and then rush to buy tax-saving instruments then you might not be making the best decision for your investment portfolio. Here, it is important to understand that tax planning in itself is not a goal. Instead, it is a means to achieve your financial goals. If you do tax planning in advance you can benefit in two ways:

1. You can reduce the amount that you pay as tax
2. The amount saved from paying lower tax can be invested to generate returns

This is why judicious and timely tax planning is an important factor in your financial planning journey. If you are one of those people who plans their taxes in advance, then you must be aware that there are various tax planning instruments that are currently available in the market. Each instrument is unique in terms of the lock-in period, returns generated, and the flexibility that it offers. A favoured tax saving option is tax-saving mutual funds or Equity-linked Saving Scheme (ELSS) mutual funds.

What is ELSS?

An ELSS is an equity mutual fund which provides a tax exemption of up to Rs. 1,50,000 under section 80C of the Income Tax Act. An ELSS mutual fund predominantly invests in equity and equity linked investments. Herein lies the biggest advantage of an ELSS. By investing in an ELSS mutual fund, you can reduce tax liability and also make potentially higher gains through exposure to equities. An investment in an ELSS mutual fund comes with a lock-in period of 3-years while returns generated are subject to long-term capital gains tax.

Key feature of ELSS mutual fund

Tax Savings: Investment in an ELSS mutual fund is allowed for deduction under section 80C of the Income Tax Act. The cumulative limit for deduction under this section is Rs. 1,50,000.

Potential Growth: Exposure to equity investments will give you an opportunity to earn higher returns over the long-term.

Diversification: ELSS mutual funds diversify their investments across market capitalisation and industries. Such funds might invest in fixed income assets as well. Diversification can help you reduce your overall portfolio risk.

Professional Management: ELSS mutual funds are managed by professional fund managers who make investment decisions with the dual aim of generating returns and minimizing risks.

How to invest in ELSS mutual funds?

As an investor, you can either choose to invest a lumpsum amount in an ELSS mutual fund scheme of your choice or you could choose to start a Systematic Investment Plan (SIP) in the same scheme. Starting an SIP in an ELSS mutual fund scheme is simple and has certain advantages over investing a lumpsum amount. The key benefits of starting an SIP in an ELSS fund include:

• Investing a lumpsum amount at the end of the year can have an impact on your monthly budget and become a financial strain. On the other hand, you can start an SIP in an ELSS mutual fund with as low as Rs. 500. This means that an SIP allows you to continue your investment journey and reap the benefits of tax-planning without any financial strain.
• If you invest through an SIP, you not only get the above benefits but can also take advantage of the benefits offered by the SIP vehicle. This means that you can benefit from the power of compounding, take advantage of rupee cost averaging, be disciplined in your investing, and avoid timing the markets.
• Last minute lumpsum investment decisions can often be sub-optimal and potentially cause harm to your investment portfolio. However, if you plan in advance and systematically invest through an SIP then you can ensure that the investment fits in well with your overall portfolio goals.

There is a saying in Hindi, ‘shush kaam mein deri kaisi’. When you can choose to make an investment that can bring you closer to your financial goals and help you save tax, then why delay the decision to invest?

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