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Mutual Fund | February 22
What is ELSS and how it is different from SIP ?

Equity Linked Saving Scheme - A tax saver fund

Do you want to save your taxes under Section 80C?

Do you want your funds not to be locked in for running years?

Also, do you want to enjoy the inflation-beating returns of the stock market without getting much involved?

Well, I have a tailor-made product for your investment needs and goals. It is called as  Equity Linked Saving Scheme or ELSS.

ELSS is a unique mutual fund product that offers you a higher return along with the facility of saving taxes under Section 80C up to Rs. 1.5 lakhs.  The majority of the fund (80-90%) is invested in the equity-linked securities which provide a relatively higher return (along with a higher risk) as compared to the other traditional products.

These are open-ended funds that can be your first-ever exposure to the glistering and rewarding world of the stock market.


 Comparison with other saving schemes.

 Under Section 80C there are a plethora of schemes that will help you in planning your taxes. Some of these schemes are Public Provident Fund, Tax-saving Fixed deposit, and National Saving Certificate to name a few.

 Let’s compare these funds with ELSS mutual funds on the parameters of their returns and lock-in period:

  • Talking about the returns, most of these traditional instruments provide a fixed return of bare 7-10%, whereas ELSS’s returns are subject to market risk but range anywhere between 15-18%.
  • Also, the capital gains in these schemes are subject to taxation, whereas ELSS’s returns are partially taxable at a concessional rate of 10% if the gains are over and above Rs. 1 lakh.
  • The lock-in period of PPF is 15 years, tax-FD is 5 years and National Saving Certificate is also 5 years. An ELSS have the shortest mandatory lock-in period of three years.

 

Pro tip: Though the lock-in period is short, you shouldnt see this as a short-term investment product. Getting invested in such a product with a long-term horizon can provide you with enormous yield

Then, how is it different from SIP?

It is not uncommon for a naive investor to be baffled by the number of financial jargons used in the investment space. You might have also interlinked the two words- ELSS and SIP but these two are entirely different concepts.

 As read above, ELSS is a tax saving mutual fund product whereas SIP or Systematic Investment Plan is the method by which you can make these investments. It is a mere tool to invest in a variety of mutual fund schemes including ELSS.

 Through SIP, you can contribute a fixed amount consistently over a period of time. The main benefit of SIP lies in the fact that it averages out the purchase cost of your mutual fund units. A study says that investing via SIP for more than 4 years makes your investment almost risk-free.

SIP in ELSS

It is always advisable to invest in funds like ELSS via SIP mode rather than lump sum amount. There are a number of benefits to count to prove this ideology.

 

First, SIP helps you in making yourself disciplined towards investment. Second, ELSS being market-linked products makes you worry about the highs and lows of the index-level, stocks etc. SIP encourages you to invest no matter what are the market sentiments. This way you don’t sell when everyone is selling and buys when everyone is buying. Third, being a naive investor you don’t have a lot of time to study about the market levels also and going through this method proves beneficial for you.

 One thing to note, each and every installment of SIP is subject to three years lock-in period. For example- if you have started a monthly SIP of Rs. 500 from 1st April 2019, this will be locked-in for 3 years until 1st April 2022. However, the next SIP of Rs. 500 on 1st May 2019 will be locked-in till 1st May 2022.

Pro Tip:  Always go for a growth plan rather than a dividend plan while investing in Tax-Saving ELSS Funds. This way you can build a large corpus with the help of the eighth wonder of the world called compounding.

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