Benefits of starting SIP in ELSS in April

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

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The English translation of the article is as under:

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

One of the things that we can consider doing is to start planning for saving taxes right in the beginning of the year. In case if you avail the services of a good financial advisor, you must be taking care of this already. In this article, we will talk about how one can benefit out of some brilliant strategies that help achieve multiple objectives.

As we all know, we can get tax benefit under section 80C of the Income Tax Act upto Rs. 1,50,000 per year. There are various avenues that allow us to take this benefit. One of those avenues is the ELSS – Equity Linked Savings Scheme.

What is ELSS? How does it work?

ELSS, or Equity Linked Savings Scheme is a mutual fund scheme that invests in equity shares. It is generally a diversified portfolio, i.e. the money is invested across various companies and industries. The NAV of such a scheme moves in line with the average movement of the prices of shares in which the scheme has invested money. In some of our earlier articles, we have already highlighted the benefits and risks of investing in equity mutual fund schemes. We would request you to understand the risks before you invest your money. However, equity funds could be quite useful when you have some long-term financial goals to achieve. While the biggest risk in investing in a diversified equity fund is the price fluctuation, such an investment has the potential to provide protection against inflation – the rise in prices of items we consume.

This means, equity can help us fight one of the major risks in one’s financial life – price inflation. However, as a trade off, one would be exposed to the other risk, that of price fluctuations.

This risk of fluctuation in the prices of investment has certain interesting characteristics. First of all, price fluctuation is a big risk if someone is investing for a short period of time. However, the same is quite low when the investment horizon is long. Second, there are certain investment strategies that help an investor manage this risk – in fact, make this risk work in the favour of the investor. 

We will highlight this strategy here. It is not a new one, but already discussed in a few earlier articles – SIP or systematic investment plan. This is an investment plan that is available in almost all mutual fund schemes. All ELSS offer this facility. Under SIP, an investor can make periodic investments – the most convenient being monthly. 

SIP helps an investor manage the cash flow since majority of us have a monthly income and hence monthly savings. This can be very conveniently and efficiently invested in an equity scheme to achieve long-term goals. At the same time, regular investment of a fixed amount turns the risk of price fluctuations in favour of the investor. 

As we know, the number of units purchased would be equal to the amount invested divided by the prevailing NAV. Hence, when the NAV is high, we get fewer units and when it is less, we get more units. Thus, even the most ignorant of the investors benefit due to this inherent characteristics of SIP. 

Now, if you start an SIP in an ELSS in the month of April, you get multiple benefits:

1. Investment in equity fund (ELSS is an equity scheme), can help one achieve long term financial goals
2. Investment in ELSS helps one reduce the tax liability since this is eligible investment under Section 80-C of the Income Tax Act
3. SIP in an equity fund help one turn the price fluctuations in one’s favour.
4. Monthly investment eases the cash burden by spreading the investments monthly. This ensures that one does not have the year-end pressure
5. ELSS comes with a 3-year lock-in period. Holding onto your investments for that period ensures the capital gains would be tax-exempt. 

So go ahead and start your SIP this month and reap multiple benefits.

• Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions. 

Riding The Roller Coaster on www.goodreads.com

https://ridingtherollercoasterthebook.com/2016/04/15/www-goodreads-com/

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Why mutual fund is the ideal investment vehicle for goal-oriented investing

If you know your financial goals and are planning to invest your money to achieve these goals, read this article first ..

Ideal investment vehicle for goal-oriented investing

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The English translation is as under:

Why mutual fund is the ideal investment vehicle for goal-oriented investing

A very important question all investors must consider before investing is: Why are they investing? What is the purpose of investing?

All the other questions are secondary to this one. This must be the first question that an investor must consider.

Let us understand the financial requirement of most of the middle class investors. Most of middle class people have certain large lumpsum expenses to incur in order to fund some major and important events in their life. These events could be having their own house, acquiring a vehicle, getting the children educated, marriage in the family and living a comfortable retired life. All these events require large sum of money, which may not be available when the event occurs. Money must be saved earlier in order to fund these events.

These are financial goals. Funding these financial goals is the primary purpose of saving and investing for most of middle class.

Once we understand that, the next question is how does one invest money. We have two options: invest your money in various avenues yourself or invest through mutual funds. We have discussed this in detail in some of our earlier articles.

There are some basic rules that one need to follow:

1.     Keep some money in short-term investments – these investments may not fetch high returns but the money would be safe here.

2.     Allocate your money in line with your unique situation – a process known as asset allocation.

3.     Periodically one needs to check how much is the deviation from the required asset allocation. This happens since different markets, viz., equity and debt markets behave differently from each other.

4.     Consider investing in equity if the goals are far in future. However, as the goal approaches near, the exposure to equity should be reduced.

It is really in points 2, 3 and 4 above that mutual funds become extremely convenient. First of all, allocating money across various asset categories is very easy if one uses mutual funds. At the same time, when one has to shift money from one scheme to another – be it from debt to equity or vice versa – mutual funds allow very convenient switching facility.

Mutual funds also have a major benefit in terms of availability of daily NAV, which allows one to regularly monitor if the current asset allocation is in line with the required one or has it deviated. Based on this, a decision regarding switch can be very easily taken.

All these switching can be done seamlessly within a fund house. The transaction is convenient as well as low cost. Mutual funds also are highly tax-efficient when it comes to such switches.

As against that, if one has built a portfolio by buying stocks and bonds, the big decision would be which stocks or bonds to sell and which ones to buy. In case of mutual funds, it is just a scheme that one needs to get out of or get into.

It is such high degree of convenience that majority of financial advisors also prefer to recommend mutual funds to their investors.

So, go ahead and take advantage of mutual funds in order to achieve your financial goals conveniently and comfortably.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.