While earning income is a monthly occurrence, tax-saving has become an annual exercise. This means saving tax becomes a problem at the end of the year. A simple, easy and convenient way to break this pattern is to combine tax-saving and wealth creation by doing regular SIP in ELSS.
By staggering tax-saving investments throughout the year, smart investors neither face any pressure near financial year end to cut down taxes, nor expose their investments to volatility associated with lump sum fund infusion.
Historical data gives us evidence that SIP returns are healthy. Since ELSS funds come with shortest mandatory lock-in period of three years compared to other investment options like National Saving certificate and Public Provident Fund. It is good idea to see how SIP returns of ELSS funds over 3+year period are. For instance, ICICI Prudential Long Term Equity Fund (Tax Saving) delivered nearly 10.4% annual returns in last 3-year period. If you do SIP for longer time frames, then returns are enhanced to nearly 10.52% annually in 5 years, and 14.31% annually in 10 years.
The SIP route has gained popularity among Indian MF investors. There are three simple reasons why it has happened. Firstly, it allows you to invest small amounts which means mutual fund investments is virtually in everybody’s reach. Secondly, it helps in Rupee Cost Averaging which means more MF units at lower costs. Third, it makes investing worry and hands free but keeps the discipline, because investments happen automatically without being worried about market volatility.
Some investors panic and stop their SIPs when the equity market drifts downward. This is a mistake. It is only when the market is down that you end up getting more units.
Using rolling returns data for 3 year time period, you can see how ELSS as a category has not given negative returns. As much as 80% of times returns have been between 8% to 15% and over 16% of times, returns have been in 15%-20% bracket. If you want to take advantage of 100% tax deduction under Section 80C, then simply doing a SIP of Rs. 12500 per month will ensure that Rs. 1.5 lakh (Rs. 12,500 X 12) is done without any manual intervention. Once you have registered your SIP in a chosen ELSS, saving becomes automatic as the decided amount is invested at fixed interval.
