With many tax saving investments available, what are the important things that make equity linked savings scheme (ELSS) investments made through systematic investment plan (SIP) more advantageous?
Hello and welcome to FundooMoney, your 24X7 buddy for all your money matters. As some of us are aware that equity linked savings scheme (ELSS) offered by mutual funds not only allow tax deductions for investments up to Rs 1.5 lakh under Section 80C, but being an equity fund, your money gets invested in equities. Like all equity funds, over the long-term i.e. 8-10 years or more, they typically provide high returns.
On the other hand, systematic investments plans (SIPs) allow you to invest regularly in any mutual fund. So, does it make sense to invest in an ELSS through an SIP? You bet it does. We will discuss this some more but in just a little while.
ELSS + SIP = Great Advantage ELSS scores much higher than many other tax saving investments since it gets to invest in equities which has the potential to provide high returns in the long-term. The chances of these benefits accruing to you improve significantly when you invest in an ELSS which has performed consistently over one-, three- and five-year periods.
Compared to ELSS, most other tax-saving investments have lower risk and can provide only moderate single-digit returns. Most of this growth of money gets devoured in the long-term by inflation.
SIP is an effective way of investing in ELSS as it helps you benefit from the concept of rupee cost averaging. Thanks to your regular investments, typically monthly investments, you buy more units when the market is low and lower number of units when the market is high. As a result, over time, the average cost of buying a unit remains low and as the value of your investments increases, you make substantial gains.
In effect, a mutual fund SIP helps you in the same way as an SIP of an equity fund. Here the bonus is that you are also saving tax. As your income increases you can create portfolio of mutual funds for different needs such as child’s higher education. ELSS can be an investment in each portfolio where your savings gets augmented by SIP contributions.
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