Money, money, money, yes it is the money which keeps the world moving. But it is more important to save the money than earning it. For the purpose of saving the money, one should plan to invest it wisely through a dependable mutual fund plan. But, alas paying taxes led to draining a lot of hard earned money. But the good news is that there is a very good solution for saving the tax.
For this reason, for everyone who has not yet planned for the tax related investment, the topmost priority is the tax saving schemes. Of course, some of the obvious options are mediclaim, Public Provident Fund (PPF) and life insurance. But there is on more attractive option which is extremely beneficial. How about Equity Linked Saving Schemes (ELSS)? Yes, these ELSS are awesome for tax planning purposes. These ELSS are also commonly known as tax saving funds, and offers an incredible way for saving tax due to deduction included under Section 80C.
What is ELSS?
ELSS refers to a usual diversified equity scheme of mutual fund. It is a tax saving mutual fund which stores numerous benefits. It has option for tax breaks and needs a lock- in period of 3 years from the date of its commencement. This clearly means by investing is ELSS through SIP i.e. a systematic investment plan, the investment will remain locked for 3 years from the date of commencement.
Significance of ELSS funds
One can avail the benefit of tax deduction up to Rs. 1,50,000 under the Section 80C included under the Income Tax Act. In case the person invests an amount of Rs. 1,50,000 in ELSS, he/she can save Rs. 45,000 (i.e. 30 percent on top tax bracket). Hence, the amount to be invested in ELSS is deductible from income prior to tax calculation. Hence, one should carefully select the best tax saving mutual funds.
From April 1, 10% tax will be levied on long term capital gains which are made on transferring the equity mutual funds with an equity exposure 65% or more with capital gains more than Rs 1 lakh in a year. However, those LTCG which are made till the date January 31, 2018, will remain tax-exempted.
Making Early Investment
The major pitfall is that usually the tax-payers start investing in ELSS only at the end of a financial year (FY), when they are under the pressure of submitting investment proof. However, the fact is that such a situation results in cash flow related issues at the end of the FY. Also, investing in ELSS at the end of the year pushes the person to invest a huge amount which poses the market risks. In case the equity market is up, the person is forced to buy the funds at higher prices, which will also adversely affect the returns. For this reason, a person should plan to invest early through SIP in ELSS for availing the advantages of rupee cost averaging.
Investing Beyond a Term of Three Years
Among all the tax-saving plans, the shortest lock-in period is offered by ELSS funds i.e. three years. However, in case of other plans the lock-in period varies from five to fifteen years. One of the most common blunders made by the investors is to redeem the investments in ELSS at the very end of three year term of ELSS. As the underlying asset is equity, the person should try to stay in the plan for atleast five to seven years for getting good returns.
For this reason it is futile to pull back the investment amount as soon as the three years term expires. Besides offering tax break option, ELSS also has ability to bring back better returns in comparison to other tax saving plans. Moreover, it is also not affected by inflation in the long run. Hence, it will not be wrong to say that ELSS is the best tax saving plans till now. It matches with the needs of every investor and awesome in each and every respect.
ELSS as a Competent Performer
It might happen that the funds with current high rating in the past one to three years might not be the best ones. For this reason, the continuous focus of the investor should be on consistent track record of the investment plan. A consistent performer can be selected by comparing and contrasting the various plans available in the market. It can be done by comparing the performance of the fund with the yearly average returns in the past five to seven years. One other way is to make a comparison of the rolling returns. It is a good way for assessing the consistent performance of the fund.
One of the other common mistakes observed is that for every year the investors put fund in a fresh ELSS. As a result there are a collection of numerous ELSS funds at the end of 8 to 10 years. It leads to over diversification and makes the portfolio of the investor cumbersome and difficult to handle.
Guidelines for the ELSS investors
All those who are planning to save tax should not invest in ELSS in case they don’t feel comfortable with equities. However, ELSS is an ideal plan for all those who want to invest for a long time and understand the market ups and downs and want to stay in the plan for a long time in spite of it.
The next important advice is to invest early in the plan instead of investing at the end of FY. All those who have not yet planned in ELSS, should start planning for the next FY for availing its benefits. After investing in the plan, one shouldn’t stop abruptly at the end of three years, but stay in it for five to seven years for getting better returns. As the best way to invest in it regularly through SIP, one should carefully select the ELSS fund and stay with it for long.
Investment is a great idea of planning the funds. But one should judiciously select the plan which offers the maximum gains. Such a wise decision will help in generating excellent returns.
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