As per Section 80 C, investing in ELSS (equity-linked savings scheme) via SIP (systematic investment plan) allows you to get a tax deduction of up to Rs 1.50 lakh on your taxable income. Note that if you are in the highest income tax slab i.e., 30 per cent, then through an SIP in ELSS, you can save an amount of Rs 45,000 every year. So, with an SIP investment, you not just instil the habit of automatic investment and become a disciplined investor but also you are able to plan out your monthly investments and save tax in an effective manner. Besides this, an SIP investment in ELSS even allows you to get the benefit of rupee cost averaging, and compounding effect and enables you to begin with your investment in the preferred scheme with an amount as low as Rs 100. However, note that the only way you can accumulate the maximum corpus via SIP in ELSS is through early investment.
For instance, at 22 years, you begin your investment in ELSS through an SIP with a sum of Rs 5,000 per month at an annualised return rate of 15 per cent per annum. By the time you turn 60, you would be able to accumulate a corpus of Rs 11.50 crore. However, if you begin late, say at 50 years of age, then a monthly SIP investment in ELSS of the same amount at the same annualised return rate over 10 years would generate an overall corpus of only Rs 13.76 lakh. So, by starting early with your SIP ELSS investment, you can accumulate maximum corpus through smaller monthly investments.
How to select the right ELSS scheme?
There are multiple parameters you must consider factoring in to find a suitable ELSS fund scheme. Listed here are some of the crucial points you must consider for choosing the best ELSS scheme –
- Investment strategy
Like any mutual fund, the ELSS scheme also has the objective to deliver the highest returns. Fund managers use distinct strategies to attain this goal. You must ensure to understand such strategies well before investing. Doing so would assist you to select the correct ELSS scheme for yourself. You can get to know about the ELSS strategy through the fund’s KIM (key information memorandum), SID (scheme information document) and SAI (statement of additional information).
- Performance
ELSS scheme is not only a way to save tax but an instrument to create wealth over time. Thus, the past returns delivered by the scheme are an important parameter you must look at while selecting the ELSS scheme. There are various ways using which you can assess the fund’s performance. Performances and historical returns of ELSS funds must be studied properly. It is advised you compare distinct ELSS schemes depending on the fund’s performance for periods of 1, 3, 5 and 7 years. Also, make sure to compare the ELSS scheme’s performance with their peer funds and benchmark indices to make an informed decision. Go for the ELSS fund scheme with an excellent past record and high potential of performing well across distinct market cycles.
- Fund house
An asset management company (AMC) having an excellent market reputation is considered a suitable investment choice. Choosing a good fund house allows you to invest smartly and yield higher returns over time. While evaluating the fund house, ensure to also check the AMC’s age, its previous track record, performance, and AUM (asset under management).
Ending note
Investing in a preferred ELSS fund via an SIP helps you to inculcate investment discipline and streamline your tax planning in a more effective manner. Additionally, when you opt for an SIP investment, you not just make the most out of the compounding effect but even get the benefit of rupee cost averaging i.e., you purchase a higher number of mutual fund units when the market is falling and vice versa.
