When you invest your hard-earned money in the stock market, especially the equity market, chances are you are exposed to high levels of risk. In this process, you might lose a portion of your principal. However, if you choose your investments wisely per your personal financial goals, risk appetite, and investment horizon,you might make some significant profits from your investments.
Investing in tax saving investmentscould be a key priority for those investors who are yet to finalise their tax- planning agenda for the current financial year.There are a plethora of tax-saving investments available to an individual. You can choose from Public Provident Fund (PPF), Unit-Linked Savings Scheme (ULIP), National Pension System (NPS), tax-saver Fixed Deposits, etc. However, if your investment objective is to save tax while accumulating wealth, then you might consider investing in tax saving mutual funds i.e. Equity Linked Savings Scheme (ELSS).
ELSS mutual funds are equity diversified mutual fund schemes with at least 80% of their corpus in equity and equity-related securities. These funds are accompanied by a mandatory 3-year lock-in period. ELSS funds qualify for tax deductions of up to Rs1.5 Lakhs u/s 80C of the Income Tax Act, 9161. Since ELSS funds are invested for a minimum of 3 years, their capital gains are termed as long-term capital gains or LTCG tax. LTCG up to Rs1 Lakh and dividends earned on ELSS mutual funds are completely tax-free. However, LTCG above Rs1 lakh is taxed at 10% without the benefit of indexation. You can invest in ELSS via Systematic Investment Plan (SIP) mode or lumpsum mode.
Why should you invest in tax saver mutual fund SIP?
- Flexibility to invest according to your needs
Investing in SIP does not require you to shell out a majority of your investment at once. This is quite helpful for those investors who do not have ample to invest at one go but are expecting a regular inflow of income in periodic intervals, such as a salaried-class employee.
- Betting on the current best performers
Mutual funds topping the charts currently in terms of trailing returns might not be the optimal choice for you. Instead, individuals should seek out for funds that have a track record of consistency. To select a consistent mutual fund, an investor must compare the fund’s performance against the average returns of that particular category for the past 5-7 years.
- Instils the habit of financial discipline
Since SIP investments ensure that an individual regularly invests for a period. It instils the habit of regular investing and thus, regular savings. Since SIP is automated, the money gets invested before you spend it. You can invest daily, weekly, monthly, semi-annually, or annually. You can even invest multiple times in a month.
Be mindful that when you choose to invest in ELSS through SIP mode, each SIP investment would be locked-in for 3 years from its respective date of investment. Remember, the longer your SIP tenor, the better the compounding works.Happy investing!
