Should Your First Investment be in ELSS?

No one wants to give their hard earned money to the government in the name of taxes. However, not everyone understands tax planning. Many end up paying taxes because they get confused with the tax saving instruments available out there as they are unable to understand where and how much to invest. Those who are good at financial planning, such individuals understand that tax planning and financial planning are two sides of the same coin. Hence, one needs to learn how to manage money if they want to invest wisely and save tax at the same time.

If you are someone who is young, aggressive and doesn’t have any financial burdens, you can save tax by investing in ELSS. ELSS is a tax saving mutual fund scheme that comes with a mandatory lock in of three years and a tax benefit. ELSS is probably the only mutual fund scheme that comes with a tax benefit. Since this an equity oriented scheme, investors are expected to determine their risk appetite before investing in ELSS fund. However, if you are investing in a tax saving instrument for the first time, you should probably consider investing in ELSS.

Here’s an example to help you understand how ELSS works:

Suchit Malhotra, a music director who Rs. 10 lakhs per annum. This lands Suchit in the 30 percent tax slab. Suchit learns about ELSS through a friend and decides to invest Rs. 1.5 lakhs in it. According to the Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs made in an ELSS scheme are eligible for tax benefits. So, by investing Rs. 1.5 lakhs in ELSS Suchit managed to bring down her gross taxable income to Rs. 8.5 lakhs. Also, since ELSS is an equity mutual fund scheme the 3 year lock in period might help Suchit accrue some interest on the investment amount.

Here’s why ELSS should be your first investment –

Historically equity schemes like ELSS has outperformed its own benchmark. ELSS funds are known to offer far better capital appreciation than other conservative tax saving instruments. ELSS comes with a three year lock in which means investors can redeem their ELSS units after the lock in period. Most traditional tax saving instruments come with a lock in period which might range anywhere between five years to fifteen years. To earn better capital appreciation, one must not redeem their ELSS fund units after the lock in period and instead remain invested so that the accumulated amount continues to accrue interest.

ELSS fund has the option of SIP and lump sum investment. Depending on your income needs and investment objective, you can either make a one time lump sum investment or opt for a monthly SIP. Systematic Investment Plan is an easy and convenient tool to invest in a tax saver fund like ELSS. All an investor has to do is determine their monthly SIP investment amount, decide a date they wish to invest and complete all the KYC formalities and documentation with the fund house and their bank. Following this every month on a fixed date the predetermined amount will be debited from the investor’s savings account and electronically transferred to the fund. You do not need to visit the fund house personally for your monthly SIP investments. Thanks to the option of auto-debit the money will be automatically transferred to the fund. If you start an SIP in ELSS funds there are a bunch of other investment techniques which you can make the most out of. They are power of compounding and rupee cost averaging.

ELSS might help you save tax but it’s a high risk investment and hence, investors are expected to consult a financial advisor before investing.

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