Savings scheme

Equity-Linked Savings Scheme: How SIP makes ELSS a smart bet

Equity-linked savings schemes (ELSS), a popular tax-saving investment option, reported net inflows of Rs 4,579 crore in the three months to March as investors rushed to invest to save on taxes. In contrast, this category saw net outflows of Rs 3,870 crore for seven consecutive months from April to October last year.

Experts say that individuals invest in ELSS in the last three months of the financial year and invest a lump sum. Ideally, they should invest every month starting in April through a Systematic Investment Plan (SIP) which will help average the cost in rupees. Investments in ELSS up to Rs 1.5 lakh qualify for a tax refund under Section 80C of the Income Tax Act. In fact, ELSS has the shortest lock-in period of three years compared to other tax-saving instruments.

Advantage of SIP in ELSS

In a SIP, the money (minimum investment is Rs 500) will be deducted from the bank account and invested in the scheme. The investor will receive the units according to the net asset value of the fund on that day. Each SIP will be locked in for three years, which experts say is a plus, as equity-linked investments generate higher long-term returns and the funds are able to secure both long-term and short-term gains for Investors. Locking also ensures disciplined investments that can help the corpus grow for long-term financial needs such as children’s higher education or own retirement. The lockdown also removes the stress of short-term market volatility, which is a big concern for investors, especially newer ones.

Investing in ELSS through SIP allows an individual to invest in the program through economic cycles and over the long term the purchase price of the units is averaged. Investors can opt for a direct ELSS plan and invest online. A direct plan will have lower expenses than a regular plan, which can help investors grow the corpus more than a regular plan.

Santosh Joseph, Founder of Germinate Investor Services LLP, says if an investor invests in ELSS through SIP, he doesn’t have to worry about setting aside large sums of money and can start saving from his first pay slip . “As investing is done on a monthly basis, which is a periodic investment, you will also face market volatility. Save on a regular frequency, avoid market volatility by doing a monthly SIP and invest in a product that offers higher returns due to a three-year lock-in is the way to success in stock investing,” he says.

Look at long-term performance

As ELSS investments are long-term, investors should analyze the long-term returns of various schemes before investing. All ELSS schemes allocate a minimum of 65% to equity and the remainder to debt securities. Looking at the system’s past performance over a 5-10 year period, the consistency of the fund and the business, and how long the fund manager has managed the fund are good ways to select an ELSS system, says Joseph. Make sure the program has a mix of large, mid and small cap stocks in its portfolio, as this will show good returns in various market cycles. Plans that invest in a range of stocks and sectors are also better equipped to handle any cyclical market volatility.

Investors need to hold their investments for at least five to seven years to earn returns that outperform any other tax-saving investment option.

ELSS VIA SIP

– Systematic investment plan every month helps to average cost in rupees
— It allows an individual to invest in the scheme through economic cycles
— Each SIP will be locked for three years, allowing the corpus to grow for long-term financial needs
— Lockdown removes stress from short-term market volatility


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