Equity Linked Saving Scheme Simplified
In today's time we have a lot more options for investing our money now compared to previous decades; equity is just as popular just as debt funds. Prudent investment into various asset classes is a time tested way of increasing your wealth. Based on your age and risk appetite, you can choose your investment goal and chart your roadmap. The other side of the coin is tax planning. As wealth grows, so will be the necessity to have a good tax plan that will help you save a substantial part of your wealth. One such investment tool is ELSS (Equity Linked Saving Scheme), that not only offers higher returns on your investments but also qualifies for tax benefit under Section 80C (Income Tax Act 1961). What is ELSS? It is a diversified equity mutual fund that has a majority of its corpus invested in equities; therefore, its returns reflect returns from equity markets. Being a diversified equity fund, investors will enjoy both capital appreciation and tax benefits. It comes with a three-year lock-in period and without any age limit to investment. Though, it is recommended that one should start it early. As a practice, it is always advisable to be aware of the benefits, eligibility and the nature of the fund you invest in. t As for ELSS, let us navigate and see each of the factors in detail below. Why Should One Invest in ELSS and What Is The Benefit Under Section 80C? The Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI) have clearly spelt the investment guidelines on their portals. Simply put, any investor, willing to lock in funds for three years(minimum), should look at ELSS as a great option. According to the Income Tax Act, taxpayers are eligible for benefit under Section 80C and can gain a maximum advantage of up to Rs 46,800/. Besides this, long term capital gains would be taxed at 10% on investments exceeding Rs 1,00,000. Investors can use the SIP (Systematic Investment Plan) option to put their money starting with Rs 500 as a minimum or opt for a lump sum option. SIP gives you the benefit of rupee-cost averaging and compounding that will help you tide market volatility smoothly. By adopting the SIP route, you are staggering your investments, which brings down the risk considerably. As an investor, you can also opt for a dividend option to have some cash flow during the lock-in period. Being a diversified fund in nature, ELSS, therefore, gives you a great option of growth as well as dividend. These are the reasons why ELSS has emerged as an excellent prospect for long term fund creation. For anybody novice to the equity markets, ELSS is a great way to begin and gain knowledge and exposure to equities. Risk Assessment and Mitigation As an asset class, equity is high risk but equally has the potential to give phenomenally high returns, and this is the underscoring challenge that an investor needs to be prepared for. Owing to constant fluctuation in Net Asset Value (NAV), equity funds tend to carry high risks. Because ELSS funds give the option to remain invested for a more extended period, these risks can be mitigated, and you can reap its benefits in the long run. Current Market Volatility due to the Pandemic As the Coronavirus pandemic has brought the entire world to its knees, Global markets are equally affected and have taken a lot of damage. While the carnage seems never-ending, we humans need to stay hopeful and look for the light at the end of the tunnel. Human history has witnessed many such epidemics, and we have overcome all of them sooner or later. In the same vein, stock markets will re-emerge sooner or later. Most experts would opine to buy stock in these times when the prices are down and wait patiently for markets to improve and regain in the long term. Keeping a horizon of 5 years, investors should hold a long view and not focus on short term losses, as this Pandemic is a once in a century occurrence and not a typical business cycle syndrome. Linking it to the ELSS, as explained earlier, the rupee cost averaging methodology in SIP ELSS buys more units when the markets are low or down (as now) and buys fewer units when the market normalizes, therefore benefitting from both scenarios. ELSS ( Equity Linked Saving Scheme) is a great way to safeguard yourself during this Pandemic by staying invested and reaping long term benefits of wealth creation.