Grow With Your ELSS While Earn Through Tax Savings Too

Hemant Rustagi

CEO, Wiseinvest Advisor

Investing to achieve different goals, over different time periods is a process that requires an investor to plan and adopt a strategy to implement it effectively. An asset allocation strategy can ensure that one’s investments remain on track over different time periods.

By following an asset allocation strategy based on the time horizon assigned to each of your goals helps in allocating long-term investments  primarily to an asset class like equity, medium term investments to hybrid options and short term investment to debt and debt oriented investment options. As is evident, this strategy helps in focusing on safety of capital while investing for short term and beating inflation while investing for long-term.

While sticking to a carefully designed asset allocation model helps in avoiding any haphazard decisions, realigning the portfolio within an asset class to benefit from opportunities provided by factors such as emerging interest rate scenario, changes in the tax laws, regulations and announcements made from time to time can make a huge difference to the portfolio returns. Therefore, as an investor, you must keep an eye on these changes and have enough flexibility in portfolio composition to benefit from them.

It is quite common to see investors shying away from equities despite its proven potential to provide positive real rate of return.  It’s time for them to make equities an integral part of their long-term portfolio. While investing in equities, one must choose the right investment vehicle and build a diversified portfolio.

Equity funds of mutual funds can be an ideal option for investors to do so. Mutual funds offer a variety of products like index funds, funds investing in different segments of the market i.e. large, mid and small cap stocks, multi-cap funds, ELSS, sector and thematic funds.

As each one of us have a different risk profile and investment objectives, there cannot be a standard combination applicable to all kinds of investors. If you cannot decide the right mix, the right way to begin is to consider those multi-cap funds that invest predominantly in large cap stock and have small presence in mid and small cap stocks.

For those who would always like to be in control, the right method would be to decide on the allocation to different market caps in the beginning of the investment process and then select funds to obtain that mix.

If you are a tax payer, equity linked savings schemes (ELSS) are the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. As a product category, it has given handsome returns over the years. While, the past performance alone should not be the sole criteria for making an investment, the fact remains that over a period of time equities have the potential to provide better returns compared to other instruments.

Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under Section 80C. Another notable feature is the tax efficiency in terms of returns earned through them. It is important considering that ELSS also aims to distribute income by way of dividend periodically depending on the distributable surplus. As per the current tax laws, an equity fund investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable.

Considering that volatility is a natural phenomenon in the stock market, choosing an ELSS that has a consistent performance track record and following a disciplined approach of investing through SIP can go a long way in getting the best out of them. Since less than three months are left in the current financial years, one has to either invest a lump sum amount or stagger investments over the remaining period. However, those investors who may decide to invest in ELSS now must commit to sign up for SIP at the start of the next financial year. Planning for investments to save taxes at the start of the year helps in more than one ways.First, systematic investments in equity oriented products like ELSS helps in benefiting from averaging. Second, by investing every month, one can invest the required amount systematically during the entire year rather than worrying about having a lump sum to invest at the end of the year.  Last but not the least, aligning investment in ELSS to a long-term goal like child’s education or retirement planning can help you in benefiting from the true potential of equities. Remember, although ELSS have a mandatory lock-in period of three years, it is not that you must exit after completion of the lock-in period.  The trick with your equity investments is to give it considerable time to grow.