ELSS - The best bet for young investors

ELSS- The best bet for young investors

Are you in your early 20’s and have just landed your dream job! It sure does feel good to be over the student phase of your life doesn’t it? You are finally on your own with a decent pay check coming in each month. But just like Peter Parker you know that with great freedom comes great responsibility and you know more than anyone else that now is the time to begin your investment journey. Currently, your biggest worry is tax saving, but you ideally need an investment option that can help you do more than just save tax. You need an investment that can also help you build wealth for important milestones that will come up in your life. What if we told you an ELSS or an Equity Linked Savings Scheme is one of the ideal solutions for young tax payers such as yourself. Here is all you need to know about ELSS and why it is best suited for you:

What is ELSS?

ELSS stands for equity linked savings scheme. As a name suggests, it is essentially an equity oriented fund that offers tax benefits upto Rs. 46,800* annually under Section 80C of Income Tax Act 1961.

There are many tax savings instruments available today. How is ELSS more efficient as compared to them?

Yes, it is true there are many tax savings instruments and other small savings schemes that come with a sovereign guarantee. However, ELSS is an instrument that gives you tax benefits, helps grow wealth. Moreover, ELSS helps you easily invest in a well-diversified equity portfolio with low costs and complete transparency.

How does the lock in an ELSS help me a young first-time investor?

As a young earner, it is difficult in the initial years to understand the markets and make appropriate investments directly. ELSS funds provide the opportunity to participate in the Equity markets and get access to a diversified portfolio, that can help one test waters in equity markets at a low cost. Secondly, it takes care of the tax planning aspect that reduces your taxable income in a timely manner. In your initial years it is not unusual to be tempted to liquidate or redeem one’s units in an open ended fund to meet some expenses. However, when your investments remain locked in you do not have the option of redemption before the mandatory lock in of three years.

Should I consider a SIP or a lump sum in an ELSS?

Like any other mutual fund scheme, ELSS funds offer the facility of SIP. Any SIP provides you two advantages. These are rupee cost averaging and compounding. Rupee cost averaging means that you buy a lesser number of units when markets are high and a greater number of units when markets are low. This averages out your costs and also provides you protection against volatility. The second advantage is that of compounding. This means that returns from your invested are re-invested into your principal amount. Over time, this leads to capital appreciation. For a young earner, SIP is a better option to avail of, since it does not put a strain on your pocket and helps you save taxes on one hand and helps you meet a financial goal on the other. If you begin a SIP in an ELSS at the beginning of a financial year, you will no longer need to scrounge around for tax saving investment options when the season to furnish investment proof is close. On the other hand, if you invest a lump sum in an ELSS, you always run the risk of timing the market, that may work to your disadvantage if the markets are in a slump.

What kind of financial goal can an ELSS meet?

As explained earlier, an ELSS is essentially an equity oriented fund. Equities as an asset class are best suited to meet long-term goals. Thus it is best to tie your SIP in an ELSS to a long term financial goal such as building a retirement corpus. The earlier you begin building your retirement corpus, the greater your chances of wealth creation at a later date. This in turn, will allow you to lead a comfortable second innings.

Will ELSS lose its relevance for me if I shift to the new tax regime as proposed by the Union Finance Minister in 2020?

The choice of old or new tax scheme depends on the tax slab you are in. For young investors earing between Rs 7 and 8 lakhs per annum, remaining under the old scheme makes more sense as your tax liability under old scheme will be lower at Rs 23,400 after investing Rs 1.5 lakhs under an ELSS scheme as compared to Rs 33,800 without investment and no deductions. Besides, you get all the above mentioned advantages and take firm steps towards wealth creation with your first investment in ELSS.

Disclaimer

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS. ELSS Investments are subject to a 3 year lock-in. An investor education and awareness initiative by Axis Mutual Fund

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.