Here’s an example to help understand how ELSS works –
Ramesh Shah is a branch manager of an audio company with an annual income of Rs. 14 lakhs. This lands him in the highest tax slab. Ramesh learns about
ELSS and decides to invest Rs. 1.5 lakhs in it. According to the Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs made in an ELSS scheme are eligible for tax benefits. So, by investing Rs. 1.5 lakhs in ELSS Ramesh managed to bring down his gross taxable income to Rs. 12.5 lakhs. Also, since ELSS is an equity mutual fund scheme, the 3 year lock in period might help Ramesh accrue some interest on the investment amount.
What is a Systematic Investment Plan?
A Systematic Investment Plan, often referred to as SIP, is an easy and convenient way to invest mutual funds like ELSS. SIPs allow investors to invest a fixed amount at regular intervals in an ELSS scheme of their choice. SIPs are ideal for those who do not have the resources or don’t want to make a lump sum investment in ELSS funds. Investors can choose an amount they are comfortable investing in ELSS at periodic intervals (typically every month) and continue investing this amount till their investment objective is achieved. However, the SIP sum which an investor decides cannot be lesser than the minimum investment amount mentioned in the SID (Scheme Information Document).
A KYC compliant individual can easily invest in an ELSS fund via SIP from the comfort of their home or office using a laptop / smartphone and decent internet connection. All an individual has to do is decide on the monthly
SIP sum and instruct their bank to allow auto-debit. After which, every month on a predetermined date the SIP sum will be deducted from the investor’s savings account and electronically transferred to their ELSS portfolio.
Benefits of investing in ELSS via SIP
Here are some of the primary benefits that you can avail for starting a monthly SIP in ELSS scheme –
Power of compounding – In mutual fund terms, compounding refers to the interest earned on interest earned from the initial investment amount. When the amount you invested earns interest, and when that interest starts accumulating interest of its own, it is referred to as the power of compounding. An investor can benefit from compounding if he / she continues to invest in an ELSS fund via SIP for the long term.
Rupee cost averaging – since the SIP amount continues to remain stagnant, the allotment of units may differ depending on the fluctuating NAVs. When the NAV of the ELSS scheme is low, more units are allotted and vice versa. This adjustment is referred to as rupee cost averaging and looking at the fluctuating equity markets investors might receive more units.
To save tax and generate long term wealth, starting a SIP in an ELSS scheme might be a feasible choice. However, it is essential to determine one’s risk appetite before investing in high volatile equity oriented schemes.