One should always plan their tax-related investments in advance and invest through the SIP route in ELSS to get the benefit of rupee cost averaging. – In simple words – “Tax saving”
By investing in ELSS mutual funds, one is eligible for tax deduction up to Rs. 1,50,000 u/s Section 80C of Income Tax Act. If you invest Rs. 1,50,000 in ELSS, you will save Rs. 45,000 (30% on the top tax bracket). So, the amount that you plan to invest in ELSS can be deducted from your income before calculating taxes. This is subject to an overall cap of Rs. 1,50,000 on the investment amount along with other tax-saving instruments
Start investment early
Many taxpayers normally tend to start investing in ELSS funds saving instruments at the end of the financial year, when the time to submit investment proof is upon them. This is a bad investment and tax-planning strategy. In such a situation, one could face cash flow-related problems towards the end of the financial year. Moreover, investing towards the end of the year forces the investors to put a lump sum amount in ELSS. This, in turn, creates the risk of market timing. If the equity markets are up, the investor ends up purchasing the fund’s units at higher valuations, which in turn affects his returns. One should always plan their tax-related investments in advance and invest through the SIP route in ELSS to get the benefit of rupee cost averaging.
Continue to invest beyond three years
Of all the tax-saving products, ELSS funds offer the shortest lock-in of three years. In other products, the lock-in period varies from 5 to 15 years. A common mistake most investors make is to redeem their investments in ELSS as soon as the three-year lock-in ends. Since the underlying asset class here is equities, they should stay invested for a time horizon of at least five-seven years to garner good returns. Hence, one should not pull out his money as soon as the three-year lock-in ends. While ELSS gives a tax break, it also has the potential to generate superior returns when compared to other asset classes as well as beat inflation in the long run. ELSS funds are the best in the tax-saving lot to date as these funds suit every category of investor.
Betting on the current best performers
The funds that are topping the charts currently (in terms of trailing returns over the past one or three years) may not be the best choice for you. Instead, investors should focus on funds that have a track record of consistency. To select a consistent fund, one must compare the fund’s performance with the average returns generated by the category year-wise for the past five or seven years. Another alternative is to compare rolling returns. This is a good measure for capturing consistency. Another commonly observed mistake is that investors put their money in a new ELSS fund every year. Over an 8–10-year period, they end up accumulating many ELSS funds. This causes excessive diversification and results in cumbersome portfolios that become hard to monitor.
Key Takeaways
Investors looking to save on tax should avoid ELSS funds if they are not comfortable with equities. ELSS is an ideal tax-saving vehicle only for those investors who are willing to stay invested for the long term, understand volatility, and are willing to ride through it. Further, one should plan these investments as early in the year as possible. If you haven’t done so, then this is the right time to plan for the next financial year in April itself. And once you start, there’s no need to stop investing next year. Since the best way to invest regularly in a fund is through SIP, you should just start one in a carefully chosen ELSS fund and let it run for a long duration.
Be a wise investor! – Connect