Tax Planning Benefits

ELSS is an Equity Linked Savings Scheme that permits investors and individuals to deduct up to ₹1.5 lacs from total income under Section 80C of the Income Tax Act of 1956. ELSS benefits taxpayers by increasing their long-term wealth in taxes each year. Under the terms of Section 80C, tax deductions of up to ₹1,50,000 allow you to save up to ₹46,800 in taxes every year. 

Comparison with Other Instruments

 

Long-Term Wealth Creation Strategies

Data indicates that the MF Industry’s AUM has grown from ₹24.03 trillion to ₹49.05 trillion between 30th November 2018 and 30th November 2023, a more than 2-fold increase in a span of 5 years. It shows that ELSS tax saving funds are intended to provide long-term market-linked returns. Their actual potential, however, can only be realized by investors who adopt long-term financial planning and stay patient during market cycles.

Using a buy-and-hold strategy allows the compounding phenomenon to create long-term wealth. Compounding refers to earnings created from earlier earnings, which subsequently generate more returns. When compounded over 15-20 years or more, even small annual returns of 12-52% can snowball into significant sums.

For example, a ₹12,000 monthly investment in an ELSS fund for 20 years at 12% returns would increase to roughly ₹58 lakhs. In comparison, the same investment with interest accrued but not reinvested is only worth about ₹32 lakhs. This clearly demonstrates how the power of compounding multiplies rewards sizeably over time.

Systematic investment plans, or SIPs, aim to reduce volatility and capitalize on rupee cost averaging. Investors can purchase additional units when prices are low and profit from price appreciation in the long run by investing in fixed quantities each month, regardless of market swings. By remaining invested through ups and downs, ELSS can give greater returns during bull market stages that more than offset losses or lower returns during declines.

 

Risk and Diversification

Risk management in investments helps investors meet their objectives and mitigate the losses associated with the investment. The ELSS tax saving funds are subjected to the same risks as any other equity fund plan as they are equity-oriented mutual funds. This necessitates active risk management in investments of ELSS to reduce the effect of market, volatility, and concentration risk.

• Equity markets are inherently volatile in the short run. This is why ELSS funds carry the risk of short-term price fluctuations. A long-term view of 5-10 years helps mitigate short-term volatility and focus on superior long-run returns of equities.

• ELSS funds provide diversification across different companies and sectors within a single investment. This reduces unsystematic risk impacting individual stocks.

• Investing through SIPs further helps by cost averaging and reducing the timing risk of market fluctuations.

• Choosing large-sized ELSS funds with a minimum of ₹100 crore ensures adequate diversification across 30-50 stocks.

• Opting for multi-cap ELSS funds provides exposure to businesses across market caps - large, mid, and small. This balances risk-return over cycles.

• Investing small amounts regularly in different ELSS schemes from varied fund houses adds another layer of diversification.

• Well-managed ELSS funds aim to deliver market-beating returns with relatively lower risk through prudent stock selection and asset allocation.

 

Tips for Optimal ELSS Investment

ELSS is one of the most effective tax planning strategies that not only saves taxes but also grows your wealth. From long-term wealth creation to tax efficiency, all the ELSS benefits promote optimal ELSS investment endeavors.

• Invest regularly through SIPs for rupee cost averaging and discipline.

• Start early to maximize the power of compounding over 15-20 years.

• Continue SIPs during downturns to take advantage of lower unit prices.

• Diversify your investments across 3-5 ELSS schemes of different fund houses.

• Consider switching to debt funds as retirement nears for capital preservation.

• Maintain a long-term view and do not panic during short-term market corrections.

• Check for experienced fund management teams with proven equity selection abilities.

• Choose large ELSS funds with an AUM of ₹100 crore or more for adequate diversification.

• Redeem only if needed for critical goals; otherwise, continue investments for optimal wealth creation.

• Opt for multi-cap ELSS funds to participate across market cycles through large, mid, and small-caps.

• Look at 5-10 year track records for consistency and performance relative to peers and categories.

 

Final Takeaways

Long-term returns on good ELSS funds range between 10 and 12%, which is the highest in the tax-saving category. ELSS funds also offer investors a great way to coordinate their investment and tax planning for optimal gain. Taxpayers can benefit from tax deductions and the greater long-term returns of the stock market by allocating a portion of their yearly Section 80C investments to ELSS.

It is imperative for investors to select ELSS schemes from reputable investment institutions that have demonstrated a track record of outperforming their respective categories across multiple market cycles. The secret to success with ELSS funds is to maintain your investment and take a long-term perspective. If you want to get more out of your investment journey, open a demat account with Almondz today and take charge of all your wealth management.

Disclaimer: This blog is posted solely for educational purposes. The securities mentioned are examples and not recommendations. It is based on various secondary sources from the internet and is subject to change. Kindly consult an expert before making any related decisions.