Benefits of starting SIP in ELSS in April

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

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The English translation of the article is as under:

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

One of the things that we can consider doing is to start planning for saving taxes right in the beginning of the year. In case if you avail the services of a good financial advisor, you must be taking care of this already. In this article, we will talk about how one can benefit out of some brilliant strategies that help achieve multiple objectives.

As we all know, we can get tax benefit under section 80C of the Income Tax Act upto Rs. 1,50,000 per year. There are various avenues that allow us to take this benefit. One of those avenues is the ELSS – Equity Linked Savings Scheme.

What is ELSS? How does it work?

ELSS, or Equity Linked Savings Scheme is a mutual fund scheme that invests in equity shares. It is generally a diversified portfolio, i.e. the money is invested across various companies and industries. The NAV of such a scheme moves in line with the average movement of the prices of shares in which the scheme has invested money. In some of our earlier articles, we have already highlighted the benefits and risks of investing in equity mutual fund schemes. We would request you to understand the risks before you invest your money. However, equity funds could be quite useful when you have some long-term financial goals to achieve. While the biggest risk in investing in a diversified equity fund is the price fluctuation, such an investment has the potential to provide protection against inflation – the rise in prices of items we consume.

This means, equity can help us fight one of the major risks in one’s financial life – price inflation. However, as a trade off, one would be exposed to the other risk, that of price fluctuations.

This risk of fluctuation in the prices of investment has certain interesting characteristics. First of all, price fluctuation is a big risk if someone is investing for a short period of time. However, the same is quite low when the investment horizon is long. Second, there are certain investment strategies that help an investor manage this risk – in fact, make this risk work in the favour of the investor. 

We will highlight this strategy here. It is not a new one, but already discussed in a few earlier articles – SIP or systematic investment plan. This is an investment plan that is available in almost all mutual fund schemes. All ELSS offer this facility. Under SIP, an investor can make periodic investments – the most convenient being monthly. 

SIP helps an investor manage the cash flow since majority of us have a monthly income and hence monthly savings. This can be very conveniently and efficiently invested in an equity scheme to achieve long-term goals. At the same time, regular investment of a fixed amount turns the risk of price fluctuations in favour of the investor. 

As we know, the number of units purchased would be equal to the amount invested divided by the prevailing NAV. Hence, when the NAV is high, we get fewer units and when it is less, we get more units. Thus, even the most ignorant of the investors benefit due to this inherent characteristics of SIP. 

Now, if you start an SIP in an ELSS in the month of April, you get multiple benefits:

1. Investment in equity fund (ELSS is an equity scheme), can help one achieve long term financial goals
2. Investment in ELSS helps one reduce the tax liability since this is eligible investment under Section 80-C of the Income Tax Act
3. SIP in an equity fund help one turn the price fluctuations in one’s favour.
4. Monthly investment eases the cash burden by spreading the investments monthly. This ensures that one does not have the year-end pressure
5. ELSS comes with a 3-year lock-in period. Holding onto your investments for that period ensures the capital gains would be tax-exempt. 

So go ahead and start your SIP this month and reap multiple benefits.

• Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.