You can use the funds withdrawn to meet your expenses or also re-invest in relatively safer options such as debt mutual funds to further multiply your returns
"In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses." — John C Bogle
Budget 2019 was music to the ears of the salaried class and the deal only gets sweeter if you invest in options available under Section 80C of the Income-Tax Act. From FY2019-20, you will not have to pay not any tax if your taxable income is Rs 5 lakh or lesser. Add your investments in under Section 80C and an income of up to Rs 6.5 lakh can be tax-free. Within Section 80C, equity-linked savings schemes or ELSS funds stand out. ELSS mutual funds offer you the dual benefits of investments and tax savings.
Here are five ways to win with ELSS:
Early bird
The tax-saving season ends in less than two months; there is still time to reduce your tax bill by investing in ELSS funds. However, if you also want to create wealth in the long run it helps if you start investing small amounts from the beginning of the financial year.
Pick SIP or lump sum
With ELSS funds you can opt for a systematic investment plan (SIP) or go the lump sum way. If you want to opt for SIP, start investing in amounts as small as Rs 500 per month. Alternatively, if you want invest a significant amount as lump sum, go ahead and invest the bonus you receive at the end of the year. Both these options give you the benefit of compounding and rupee-cost averaging. In rupee-cost averaging, you earn more units when the markets are volatile, whereas in rupee cost averaging the value of your investment goes up when the markets do well.
Switch funds with ease
With ELSS, you can shift between different funds, if you are not satisfied with the performance of your current investments. However, you can switch funds only after the three-year lock-in period has ended. In case you invest via SIP, each monthly installment has a lock-in of three years.
Play a longer innings
ELSS funds are essentially equity investments and generally provide better returns if you stay invested in it for at least five years. Even amid volatile markets, it is better that you stay invested. Don't judge your ELSS fund by its performance in six months or a year or redeem as soon as the lock-in period ends. In the long run, data from the CRISIL - AMFI ELSS Fund Performance Index (March 2018) shows that ELSS funds offer better returns as compared to employee provident funds, public provident funds, national savings certificates and tax-saving fixed deposits.
Earn even after retirement
You can keep investing in ELSS funds until you've got five years to retire. Once you have built a substantial retirement corpus through with ELSS funds, you can simply set up a systematic withdrawal plan (SWP) to withdraw a fixed amount from the corpus on a monthly, quarterly, semi-annual or annual basis. You can use the funds withdrawn to meet your expenses or also re-invest in relatively safer options such as debt mutual funds to further multiply your returns.
The writer is head, investment products, Sharekhan by BNP Paribas
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