Many investors in the rush of reducing their tax liabilities on a short instance often end up investing either in SIP in ELSS or putting the entire sum in an ELSS mutual fund. But is it worth making such a choice? Is this step going to benefit them in a long-term? Well, in most instances, yes. Since it also depends on how much tax liability do you fall into? Whether your tax liability allows you to claim such rebate? Well, in such scenario, your income becomes the foremost priority on which tax assessment would be done. If you are earning a higher income and are falling in the tax bracket of 10%-30%, you can still save it in the havens of ELSS. This equity-linked savings scheme is a diversified equity mutual fund designed for tax savers to claim rebates of ₹ 1,50,000 from their investment.
Start working quickly on your tax savings approach before chartered accountants start deducting a specified portion from your income which is known to be your taxable income or income tax liability.
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Equity Linked Savings Scheme is a type of mutual fund scheme which offers tax benefits under Section-80C of the Income Tax Act, 1961 with a mandatory lock-in period of 3 years. As the name suggests, more than 65% of the portfolio consists of equity holdings, thereby offering the investors the twin advantage of capital gains and tax savings. Typically, it is an ELSS fund manager which invests in a diversified bunch of equity and equity-related securities. Apart from a 3-year lock-in period as one of its salient feature, the scheme is available for investors to invest either in growth and dividend option.
ELSS : Which investor should Invest?
ELSS should be considered by those investors who have a moderate to high-risk tolerance. If you are willing to gain benefit from ELSS, consider investing in a horizon of atleast 5 to 7 years. It is an ideal time frame to reap benefits from ELSS from swings of stock market fluctuations. It is also equally good for new investors and retirement individuals to invest, provided a thorough research has been undertaken by them before taking a plunge. Before investing, always check the fund manager’s performance, the portfolio of the fund, and the expense ratio of the fund.
Since equity investments entail volatility over shorter durations. It will be risky if you park away your funds in ELSS for a shorter duration. However, equities have comparatively outperformed the market in the longer run aiming higher returns as compared to traditional investment instruments. With a compulsory lock-in period of 3 years, the risk is substantially lower. Also, there is no compulsion to redeem the amount after maturity and can be continued by an investor with their investment if they wish to do so.
Lump Sum Vs SIP in ELSS
Having sufficient money to invest in ELSS at the start of the financial year i.e. April? Well, it’s a good idea to park away your money as lump-sum i.e. making one-time investment rather than going for SIP. As ELSS is subject to the market volatility of stock market fluctuations and you never know when your monthly SIP help you to get a lower number of units of your ELSS. So, it’s good to invest in lump-sum when the market is low as you give some time to the market itself to take the leap and deliver you higher returns. On the other hand, if you invest in SIP when the market is higher, you don’t know whenever the Sensex (stock market index) falls down and you will be allotted with the lower number of units towards SIP you invest for that month. Timing the market often comes in the mind of general investor. But do you think will you be able to time the market through SIP? Ofcourse not. It’s risky to time the market through SIP. However, investing in one-time investment gives some time-off to the market even when it is running low to jump at that level that could offset the losses(in terms of profits) gained during the low-time period.
Let us understand how your one-time investment works better than SIP?
Suppose Mr. Ronit has invested ₹ 1 lakhs lump-sum amount in an ELSS fund three years back. On the other hand, Mr. Sushil started a monthly Systematic Investment Plan of ₹ 3,000 in the same ELSS mutual fund. Over 3 years, Mr. Sushil has invested ₹ 1,08,000 on a cumulative basis. The cumulative investment made through SIP by Mr. Sushil is comparatively higher as compared to the lump-sum investment made by Mr. Ronit. Assume that over 3 years period, the ELSS mutual fund has given an annualized return of 12% on both SIP and lump-sum investments.
(in ₹ )
|Investment Mode||Cumulative Investment|
(in ₹ )
|Value after 3 years|
(Absolute Returns in ₹ )
Although the absolute returns generated after 3 years have fetched higher returns as compared to their cumulative returns on an annualized returns of 12%. It is clearly understood that the value after 3 years is higher both for lump-sum & SIP on account of market volatility. However, in terms of absolute returns, the lump-sum investment of Mr. Ronit accumulated much higher returns than SIP of Mr. Sushil, irrespective of Mr. Ronit invested slightly higher on a cumulative basis. Does this mean lump-sum is better than SIP? Definitely, yes. No matter lump-sum and SIP are just two different types of investment. So, obviously, Mr. Ronit’s absolute returns (Value after 3 years) are higher as compared to Mr. Sushil. However, investment of Mr. Sushil was not completely for the entire period on an immediate basis, since the money was invested in small monthly instalments of ₹ 3,000 over 3-years time period.
To sum up, Mr. Rohit has gained 40% more in terms of returns realized after 3-years maturity period as compared to Mr. Sushil who made 20% returns with respect to their cumulative investment. It also means Mr. Ronit has earned ₹ 9,969.86 (₹1,40,492.80- ₹1,30,522.94) more returns from Mr. Sushil.
1. One-time investment is better than SIP to offset the losses for a particular time period
2. It is healthy to invest for a longer time period especially 5 to 7 years. Also 10- years investment would be the best option.
3. In order to start with, outstretch your one-time investment over a financial period and avoid investing through lump-sum in the last minute. This strategy will definitely help you out to ‘time’ the market.
4. The higher returns generated in the longer run will beat the inflation automatically as the returns generated would substantially ‘time’ the market.
5. Inculcates faith in you to invest confidently in ELSS Mutual fund for higher returns as compared to traditional market instruments(like PPF, EPF etc).
6. Tax saving under Section-80C can also be equally good for both saving tax and wealth creation.
7. With a one-time investment, you give some time to the fund manager for making equities work in a right way for you.
8. Within 3-year lock-in period, you allow your one-time investment to grow in a substantial way.
9. One-time investment over a particular financial year always stands to be helpful in giving you tax rebates of ₹1.50 lakhs per annum. This works best at the time of showing your investment declaration proof when you don’t have much another traditional instruments to show as a proof.
Disclaimer : Mutual Fund Investments are subject to market risks, read all scheme related documents carefully before investing.