Ever wondered why your investments don’t fetch high returns? Blame it on the inflation, which led to the rise in prices of goods and services with time. As inflation rises, it diminishes the value of your investments. The prices of products and commodities could increase due to the coronavirus pandemic. In these tough times, ELSS can be an investment that beats inflation.
Equity-Linked Saving Scheme or ELSS is a tax-saving mutual fund, investing predominantly in the equity front. You get double benefits of wealth creation and tax saving. Ideal for first-timers in the stock market, you can get inflation-beating returns in the long run. ELSS comes with a lock-in period of three years, the shortest among tax-saving investments under Section 80C. The maximum deduction under Section 80C of the Income Tax Act, 1961, is Rs 1.5 lakh a year.
ELSS investments have given superior returns to investors who have a time horizon of five to seven years. Though volatile in the short run, they can give you higher returns over a long period. Make your investment either as a lump sum or through SIP. A Systematic Investment Plan or SIP is a method of staggering investments over some time. It is a safe method of investing in mutual funds. You can invest as low as Rs 500 a month in the SIP of an ELSS.
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Investment through SIP helps you invest the savings set aside each month. It is better than leaving them idle in a low-interest savings bank account. Opt for the auto-debit, which is a bank mandate to debit the amount to be invested in the scheme. It teaches discipline, forcing you to curtail spending and put in a fixed amount regularly.
SIP gives the rupee cost averaging benefit over time. You will get more units by continuing to invest when prices are low and lesser units when prices are high. It averages the cost of units, removing the need to time the markets. ELSS investments are ideal for those in the highest tax bracket. Investing Rs 1.5 lakh a year in ELSS will help you save up to Rs 46,800 in taxes.
The coronavirus pandemic has impacted the stock markets. They have fallen to their multi-year lows. Considering that, it’s wise to invest in ELSS at this point. By doing so, you can get higher returns in the medium or long term. It’s difficult to predict market crashes. Invest through SIP if you seek protection against market volatility. You are always in the market, accumulating more units when prices are down. It eliminates the need for market timing, making this the right time for the investment.
To sum it up, invest in ELSS only if you have the risk appetite to invest in stocks. Link the investment to a financial goal like a child’s education, buying a house, or retirement.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
