"A penny saved is a penny earned, and a penny saved on taxes is even better." - T.S. Eliot
We bargain for every single rupee in the bazaar and yet when it comes to taxes, we practically give it away without thinking of ways to legally save it. It’s not even that difficult. Simply you may invest in an Equity Linked Savings Scheme (ELSS).
An ELSS is a Mutual Fund scheme created for tax-saving along with seeking potential returns. As the name suggests, this scheme invests most of its money in equity and equity related instruments. Whatever you invest—up to Rs 1.5 lakh—in an ELSS scheme is deducted from your total taxable income. This, then, helps you save tax.
What makes ELSS so good?
Well, ELSS is not just an option for tax-saving. It also helps you create wealth.
Stocks are known for their fluctuation, but that does not just mean a possible fall in value, but also an increase in value! This gives stocks more potential to deliver probable returns. And since ELSS invests in stocks, they have a potential to deliver returns too.
But it doesn’t stop there. An ELSS scheme also offers other benefits:
1. Smaller lock-in period
An ELSS fund has a lock-in period of only three years. You can choose to hold on to the scheme or sell it after three years. In contrast, you would not be able to withdraw your money from a Public Provident Fund before 15 years. Most other instruments have a lock-in period of 5 years. This means your money is more easily available to you with an ELSS.
2. Automatic diversification
ELSS, like any other Mutual Fund, invests in various different assets. This is called diversification which helps reduce risks because when one asset falls in value, the other may rise or remain unaffected. This reduces the risk of loss.
3. Less volatile than a regular Equity Fund
Experts suggest that ELSS schemes tend to be less volatile than a regular Equity Fund. This is because of the three-year lock-in period. During that time, no one can sell their ELSS units. This reduces the fluctuation of the Fund’s value, lowering its risk.
4. Automate Your Investments:
One of the biggest benefits you get by investing in an ELSS is that you could invest via Systematic Investment Plan (SIP). This helps you spread out the Rs 1.5 lakh into small monthly amounts. And at a fixed date, the money gets debited from your bank account automatically. This way, you can invest Rs 12,500 every month, as opposed to Rs 1.5 lakh at a time, which can seem too big an amount. Plus, SIP helps you average your cost of investment too since you invest across different market conditions.
ConclusionInstead of a single ELSS scheme, diversify across different ELSS funds as you end up giving money to different fund managers to manage. Consider investing in consistently performing ELSS schemes and diversify across schemes that have small-mid and large cap exposure are some of the factors that can be considered. Also, the past performance may or may not repeat in future. Hence investors should consider this risk element before investing in such funds. Considering the returns and factoring in the tax advantage, ELSS is double-edged weaponry in your armory for the creation of wealth in the long term. So, what are you waiting for? Invest in this diversified mutual fund scheme to save tax AND seek to create wealth over the long term.
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