Who doesn’t want to save tax on his income? Everyone does, right! But do you really plan your taxes well in advance? Most of us if not all, keep their tax planning at bay throughout the year and consider it only during the end of financial year.
Investors tend to make mistakes if they take decisions in hastiness. And due to which they end up investing in those instruments which might not be suitable for them. So, when an individual should ideally start planning for their taxes?
Well, an individual will be in a better position if he starts planning at the beginning of the financial year only. This will provide him plenty of time to think, consider and reconsider a particular investment option.
Now I am going to discuss about one of the best tax-saving tool which will help you in lowering your tax outgo without compromising on the returns. The instrument about which I am talking about is ELSS (Equity Linked Saving Scheme).
Now let us first understand what ELSS funds are and what they have in for us.
WHAT ARE ELSS FUNDS?
ELSS funds are those mutual fund schemes that invest 65% of its assets in equity and equity related instruments. The main advantage of investing in these funds is that an investor is eligible to claim deduction up to Rs 1.5 lacs under section 80 C of the Income Tax Act 1961.
These funds are capable of generating high risk adjusted returns and have a lock-in period of 3 years. What this means is that in case of SIP, each and every installment will be locked in for the next 3 years.
FEATURES OF ELSS FUNDS
Tax saving instrument
ELSS funds qualify for tax deduction under section 80C which means you can claim investments up to a limit of Rs 1.5 lac as deduction and hence, can lower your tax liability.
Minimum lock-in period
These funds have a lock-in period of just 3 years which is the lowest if we compare it with other traditional tax saving instruments like PPF, NSC, 5 year tax saving FD etc.
Flexible investment options
Every mutual fund scheme allows its investors to invest either in lump sum or through SIP, and ELSS is no different. You may choose any investment option which suits you the best. However, it is advisable that one should invest in ELSS funds via SIP as it would not only protect your investments from the volatility of the markets but also help in averaging.
Higher risk adjusted returns
Unlike traditional tax saving instruments, ELSS funds are capable of generating better risk adjusted returns. The returns may vary from 15% to 18% over the long term (5 years or more).
REASONS WHY ONE SHOULD INVEST IN ELSS IN THE BEGINNING OF FINANCIAL YEAR?
Now let us discuss some of the reasons and benefits of investing in advance in ELSS funds. These are:-
If you start investing in the beginning of the financial year then you would probably save your investments from the volatility of the markets. One can start a SIP in an ELSS scheme in order to ride the volatility with ease which will also help you in averaging your investment cost.
Avoid notional loss
Consider two scenarios wherein in one you are investing at the beginning of the year while in the other you are investing at the end of the financial year. Now suppose the markets have performed fairly in that year. And hence you will miss out on the returns on investments made at the end of the year which would not have been the case if you would have invested at the beginning of the year.
Circumvent last-minute rush
An investor will be better off if he considers his tax planning in the beginning of the financial year only. The reason why I said this is that if you plan your taxes in the eleventh hour then there are many chances that you might end up investing in the wrong products and will regret later on.
More compounding effects
I am assuming that you know what compound interest is and how it works. So if you begin investing in ELSS funds at the beginning of the financial year then you will earn more compounding on your investment which in turn will proliferate your overall returns.
“A year from now you may wish you had started today”- Karen Lamb
Investment in equity is all about, how early you start investing and for how long you remain invested. Only time can make a difference to your wealth. And hence one should start investing as soon as he receives his first salary/income. You should not be investing just for the sake of saving taxes but should be investing for the achievement of your financial goals and growing your wealth.