Equity Linked Savings Schemes are more commonly known as ELSS schemes. These are the sole equity fund options that offer tax benefits along with all the benefits of stock market investments. Recently, ELSS schemes have evolved as a more popular investment opening with tax-saving opportunities. The investors of ELSS are eligible for claiming a tax exemption of up to INR 1.5 lakhs from the yearly taxable income of up to INR 1.5 lakh, under Section 80C of the Income Tax Act.
You can utilise a handy SIP calculator to get a clear idea regarding the prospects of your investment. This article will focus on some of the important aspects of ELSS investment through SIP as a viable solution for capital growth, especially in the long run.
ELSS through SIP
SIP is the more popular name for a Systematic Investment Plan. This is the easiest method to maintain a regular investment practice toward mutual fund schemes. It ensures the benefit of rupee-cost averaging, essentially bringing down the average buying cost of MF units.
SIPs are considered to be a satisfactory method of beginning an investment portfolio, it becomes more lucrative when it is started during the down phase of the market. It helps you acquire more units, eventually accumulating more prices when the market rises at the existing NAV. This progressively brings down the average purchase cost thus removing the risk of lump sum investment during peak market time.
ELSS- timing and risk
ELSS is a diversified mutual fund and similar to all other mutual funds, the returns are never guaranteed. However, the statistics reveal that if you stay put for a significant period in one or more renowned schemes, the returns are satisfactory. ELSS are comparatively less affected by market fluctuations. These schemes come with a fixed lock-in period of three years from the beginning of the investment.
The ELSS investment timing exclusively depends upon personal financial goals. Considering the market movements, the ELSS value may fluctuate accordingly although the possibility of any drastic change may be negated. However, the judgement should be based on a long-term perspective, rather than a short-term one.
The general trend of ELSS asset allocation is 65% towards equities and equity-linked instruments like listed stocks, etc. The standard lock-in period is three years which is the minimum among other tax-saving instruments in the Section 80C category.
Top advantages of ELSS investments
One of the most highlighting reasons for the popularity of ELSS investments is that it acts as a tax-saving investment instrument. The investors are eligible for a tax deduction of a maximum of INR 1.5 lakh for one financial year, from the entire taxable income, under Section 80C of the IT Act, 1961.
ELSS investment gains have been categorised as LTCG or long-term capital gains, which enjoy tax exemption up to INR 1 lakh including all equity gains in one financial year. Any gains above this amount are taxed @ 10%.
2.Comparatively enhanced liquidity
When compared to all other investment options under the 80C category, ELSS offers enhanced liquidity. ELSS comes with a standard lock-in period of only 3 years, while PPF offers a lock-in of 15 years while for all non-ELSS 80C investments, the time limit is 5 years.
ELSS investment does not lock up the capital for too long a period and they can even redeem their investment either partially or entirely after the completion of the lock-in term. When you invest in multiple ELSS schemes through SIP, you must remember, that every SIP is individually locked for 3 years. Therefore, careful planning is essential in this respect.
Although the lock-in period for ELSS is 3 years, it is better to remain invested in the scheme for consistent growth and overcoming the short-term market fluctuations. Although equity investments are subject to several market risks, there exists the chance of enhanced returns when clubbed with tax exemption, especially in the long run.
4.Inculcates a saving habit
ELSS investment through SIP inculcates a habit of regular saving and continued investment by cutting down on unnecessary expenses. You can begin your investment with an amount as low as INR 500/month. When clubbed with the prospects of tax saving, it allows the investors to enjoy better profits eventually, especially in the long run. You can use a SIP calculator to know the future results.
5.Advantages of equity exposure
ELSS allows investors to get accustomed to exposure to several equities and other equity-related instruments. The concerned investor can gain from stock growth. One can expect a growth of an average of about 6-8% returns through ELSS investment.
From the above discussion, we have highlighted the major advantages of ELSS investment through SIP and other relevant aspects. However, the investor must ensure proper alignment of personal investment goals, after careful consideration of the investment horizon, risk appetite, and current market conditions. ELSS offers tax-saving incentives, and meagre monthly investments ensuring wealth creation in the long run. An online SIP calculator is capable of removing all doubts regarding the prospects of your ELSS investment.