Investment is an area that
demands planning, patience and thought. If you feel that you would invest in
any mutual fund and it would be good for your returns then you are wrong. A
wrong investment can get you a loss too. However, a good and right investment
might get you a great return and even bonuses.
Moreover, you know a person should always plan their tax related
investments in advance and invest via the platform of SIP route in ELSS to
experience the advantages of rupee cost averaging.
Investing in tax planning schemes is a main priority for those who
are yet to plan and finalise their tax related investments for the present financial
year. Certainly there is good Tax
saving equity funds for you to invest in. Apart from doing investment in
Public Provident Fund (PPF), life insurance, one should take into consideration
Equity Linked Saving Schemes (ELSS) for the purpose of their tax planning.
Popularly known as tax saving funds, ELSS is one of the taxes saving tool or
vehicle that easily qualifies for deduction under Section 80C. Certainly you
can know more about this type of mutual fund and then make an investment.
For your information ELSS is a characteristically diversified mutual
fund equity scheme that comes with tax intervals and demands a lock- in period
of three years from the date of the investment. In case you invest in an ELSS via
the concept of a systematic investment plan (SIP), each investment is going to be
locked in for three years from its specific or respective investment date.
What are the Importance of
ELSS funds?
By investing in ELSS mutual funds, you would be eligible for tax
deduction up to Rs. 1, 50,000, u/s Section of the 80C of Income Tax Act. In
case you invest Rs. 1, 50,000 in ELSS, you are going to save Rs. 45,000 (30% on
that of top tax bracket). So the sum that you plan to invest in ELSS can be
subtracted from your income before calculating taxes. This is subject to a general
cap of Rs. 1, 50,000 on the investment amount coupled with other tax saving
instruments.
You should start
investment early
There are myriad of tax-payers who normally tend to start investing
in ELSS funds only towards the end of the financial year, when the time to deposit
investment proof is upon them. It is a bad investment and tax-planning
strategy. In such a scenario, one could face cash flow related issues towards
the end of the financial year. Moreover, investing towards the end of the year pushes
the investors to put lump sum amount in ELSS. This, in turn, forms the risk of
market timing. If the equity markets are up, the investor ends up buying the
fund's units at higher valuations that in turn impacts his returns. One should
always plan their tax related investments in advance and do investment through
SIP route in ELSS to attain the benefit of rupee cost averaging.
You must continue to
invest beyond the period of three years
Of all types of the tax-saving products, ELSS funds cater the
shortest lock-in of three years. In other products, the lock-in period differs
from 5 to 15 years. A common mistake most investors make is to cash their
investments in ELSS as soon as the three-year lock-in ends. As the underlying
asset class here is equities, these should stay invested for a time horizon of
at least five to seven years to garner wonderful returns. Hence, one should not
pull out his or her money as soon as the three year lock-in gets over. While
ELSS gives tax break, it even has the potential to make superior returns when
compared to other types of asset classes as well as beat inflation in the long
run. ELSS funds are finest in the tax saving lot till date as these funds are
suitable for every type of category of investor. If you haven’t tried out these
taxes yet there is no harm in probing. Once you know them you might end up
falling in love with them. Who knows the open up a new door for your future investments?
Betting on the present day
best performers
The funds that are topping the charts in the present time (in terms
of trailing returns over the past one or three years) might not be the finest
choice for you. Instead, investors should concentrate on funds that have a
track record of constancy. To select a consistent fund, you must compare the
fund's performance with that of the average returns produced by the category
year-wise for the past five or seven years. Another alternative is to compare
rolling returns. This is a great measure for capturing consistency. Another
commonly observed error or mistake is that investors put their money in a new
ELSS fund every year. Over an eight to ten year period, they end up accruing a
large number of ELSS funds. This triggers excessive diversification and ends up
in unwieldy portfolios that turn out to be hard to monitor.
Main takeaways
The investors who are looking to save on tax should definitely avoid
ELSS funds in case they are not comfortable with equities. ELSS is a perfect tax
saving vehicle only for the investors who are inclined or willing to stay
invested for the long term, understand the volatility and are enthusiastic to
ride through it. Further, one should plan these types of investments as early
in the year as possible. In case you haven't done so, then this is the correct time
to plan for the next financial year in April or June itself. And once you
start, there's no requirement to stop investing next year. Since the best way
to invest frequently in a fund is through SIP, you must just start one in a
carefully-chosen ELSS fund and allow it run for a long duration. It might turn
out to be the best mutual fund for tax
saving for you.
Conclusion
Thus, since you know so many things about this equity funds and
funds in general; you must make a choice prudently.
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