Equity Linked Savings Schemes (ELSS) have always been in limelight only because of the tax benefit of Rs.1,50,000 p.a. In this report, we emphasize investing small amounts in the sidelined ELSS schemes to not just earn tax benefits but also be able to generate superior returns from them.
We have suggested a strategy using, which, the investors could make the most out of this tax saving category of funds. The strategy is opportune for all the investors eligible for tax rebate under section 80C.
The beauty of the ELSS schemes lies in their ability to outperform equity-diversified funds apart from fetching considerable tax benefits.
Is small important?
We appreciate that an investment of Rs.1,50,000 p. a. would help investors save a substantial amount on taxes every year. However, many a time investors tend to invest this lumpsum amount towards the end of the financial year i.e. when the deadline to take tax benefit draws near. We feel it is not the right strategy to follow. The primary factor behind our reasoning is that ELSS funds are also equity oriented schemes and hence make them a bad choice with regards to timing the market. By trying to time the market every year on a similar date, investors would also be taking a risk of receiving negative returns on their investment.
Strategy 1: We suggest investors to divide the entire investment into 3 parts of Rs. 50,000 each which can be invested in January, February and March 2017. This can even be trimmed down to Rs. 25,000 or so based upon the existing tax saving investments of individual investors such as EPF, Insurance premium and so on. From April 2017 onwards, investors can commence a monthly SIP of Rs.12,500 for 12 months.
Strategy 2: Investors may also opt for a quarterly SIP of Rs.37,500. In this case, one can start a quarterly SIP from January 2017 onwards. Amount can be adjusted as per individual requirements as stated above.
Did you know?
Three consecutive years of investment in ELSS can take care of most of your tax savings for life. Investment in year 1 can be redeemed in year 4 after 3 years of lock-in and reinvested; similarly year 2 can be redeemed and reinvested in year 5 and so on. By following the said strategies, investors can continue SIPs for 3 years and stay invested in the scheme(s) for the next 3 years without any SIP
A note on the tax advantage
Investment in ELSS Funds can help you save tax up to Rs. 46,350 (for the highest i.e. 30% tax slab). We hope you make the best of all available tax deductions and exemptions.
1. Equity-diversified funds discussed are the non-index funds that seek to diversify their investments across all the sectors.
2. SIP is available for a minimum period of 6 months. A minimum number of 6 and 2 contributions have to be made for monthly and quarterly SIPs respectively.