Personal Finance

Two birds with one stone

DINESH ROHIRA | Updated on March 24, 2019 Published on March 24, 2019

Equity-linked savings schemes can help you save tax as well as earn more

Taxes and inflation are unavoidable, but you can save more in taxes (savings of up to ₹46,800 for a maximum investment of ₹1.5 lakh) and also earn higher returns every year by investing in equity-linked savings schemes (ELSS) under Section 80C.

When it comes to tax-saving tools, most people usually go for investments such as the Public Provident Fund (PPF) or the Employees’ Provident Fund (EPF) or even life insurance under Section 80C. The choice is obvious as these investment plans are low-risk options.

However, if your plan is to simultaneously build wealth for your long-term goals, investing in such schemes would not do much. This is because most fixed-income investment options have a maximum return of 6-9 per cent. So, if we take inflation into consideration, there is no guarantee that the corpus you collect would be enough for long-term goals such as retirement, children’s education, etc.

On the other hand, if you invest in ELSS, popularly known as tax-saving mutual funds, you can maximise your tax savings as well as returns. Over the past 10 years, ELSS funds as a category have delivered an average annual return of 18 per cent. Thus, you can save up to ₹46,800 in taxes and earn returns of up to 15 per cent every year with an ELSS investment. Even if we take market volatility and inflation into equation, the higher returns over other fixed-income investments will ensure that you have better chances of collecting a satisfactory corpus that would last longer.

For example, suppose you invest ₹10,000 monthly in, say, a unit-linked insurance plan (ULIP) with higher equity participation, for 30 years. Assuming a 9 per cent rate of return, you would accumulate approximately ₹1.8 crore at the time of retirement. Whereas, if you invest the same amount in an ELSS for 30 years, assuming a growth rate of 15 per cent per year, you would be able to build a corpus of approximately ₹7 crore at maturity. No doubt, this could be a worthy addition to your retirement portfolio.

How to invest

You can invest in ELSS in two ways: by investing a lump-sum amount annually or through the SIP route. When you take the SIP route, you will invest a fixed amount monthly or quarterly. If you are a salaried employee with a fixed income, SIP can be the best way forward. It will allow you to secure your future without putting any extra financial burden on you.

Additionally, ELSS is one of the most flexible tools in the category of tax-saving investments, with the shortest lock-in period of three years. So, at the end of three years, you are free to redeem your funds and withdraw the returns earned. However, if your goal is to build wealth for retirement, it is advisable to stay invested.

Another point to remember is that you need to thoroughly review your scheme’s performance once the lock-in period ends. You can do so by looking at the average returns of that category. Then, compare the present returns to the scheme’s benchmark returns. If your scheme has consistently brought better returns than its peers and the benchmark, you will know that your scheme is performing well.

In conclusion, ELSS is a great option that can help create wealth for your long-term goals and save tax at the same time.

The writer is founder and CEO, 5nance.com

Published on March 24, 2019
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