Invest in "ELSS"
Budget 2005 has offered a phenomenal combination of tax benefits on equity investing through equity tax saving mutual funds, which, when combined with a systematic investment plan, is a sure winner!
TIMES have changed and so must you. Look around and you will see a variety of new investment options that can help you fight against rising inflation and save tax.While a good rate of return enables you to fight inflation, tax saving is a very important part of financial planning, too. Because, at the end of the day, post tax returns are what really matter. It determines the actual income that is available for spending or reinvesting.
Equity Linked Savings Schemes (ELSS) provide an ideal way to save tax and earn an equity linked return on your investment. These are, basically, equity-diversified mutual fund schemes and have a lock in period of three years. Usually, more than 80 per cent of the money invested in ELSS goes into equity and related instruments. ELSS schemes have been introduced, to give a steady boost to equity markets and, therefore, the government has provided tax concessions to those who invest in this instrument. According to the newly introduced section 80C of the Income-tax Act, an investment in ELSS, up to a maximum of Rs.1 lakh per financial year, is eligible for deduction from taxable income.
Rationale for ELSS
Equity markets are on a roll, backed by robust economic and corporate fundamentals. In 2005, the sensex crossed 6900 levels and the markets have turned quite volatile. Naturally, when the markets turn choppy, it is difficult to determine their direction. However, macro-economic factors suggest that these corrections should not be a cause of worry. GDP is expected to grow at over 7 per cent, forex reserves are crossing the US $ 100 billion mark, FII inflows are forthcoming and both the banking sector and corporates are displaying good health.This should instil confidence that the markets are headed for a healthy long-term bull run.
At times like these, staying invested in the market, through mutual funds, is the best option. It gives you the benefit of professional management. During volatile times, equity fund managers stress the need for a long-term investment approach, as it offers more returns.
Further, rising inflation and uncertainty on the interest rate front have rendered debt funds lacklustre. Interest rates on other investment avenues, such as bank deposits, are yielding lower returns and hence, investing in equities seems more attractive.Top performing ELSS has delivered returns of more than 70 per cent for last three years.
So, ELSS, with its lock in period of three years, meets all your investment objectives, especially in volatile times. It can help you to save on tax and earn high returns.Thus, it is an ideal option for investors, with a longterm horizon, who are considering investing in equity mutual funds.
SIP route for ELSS
In order to take further advantage of ELSS, you could invest through a Systematic Investment Plan (SIP). In a SIP, you are required to deposit a fixed amount, at regular intervals (monthly, quarterly, etc.), in a mutual fund scheme.The minimum investment amount can be as small as Rs 500 and you could choose from monthly, quarterly or annual investment frequencies.
SIPs offer a number of advantages:
They help you take advantage of the fluctuations in the stock markets by rupee cost averaging.
They are very convenient and enforce the savings habit. As the money is deducted from your account, through post-dated cheques in favour of the fund, you are forced to save, once you make a commitment.
SIPs allow you to invest in small amounts.
When you invest in ELSS, through the SIP route, you enjoy the multiple benefits of better market-linked returns in the long run, rupee cost averaging and a tax break. So, happy investing!
IN BRIEF
Times have changed and you have a variety of investment choices before you. So, consider your options carefully.
While a good rate of return is very important, to help you to fight inflation, a tax break provides an added incentive.
The recent budget allows you a deduction of up to Rs 1 lakh for investments in ELSS.
Through ELSS you save on tax and get high returns, too!
Further, if you invest in ELSS through SIP, you reap multiple benefits.