SIPs (Systematic Investment Plans) are increasingly getting popular as the preferred mode of investment today. Investors are ready to keep aside a minimal amount every month for SIPs, rather than investing lump sums. When you are given a provision to make good returns through a regular, timely, and affordable method, who would not prefer it?
One such strategy that helps with tax saving is ELSS (Equity Linked Saving Schemes). These schemes invest in Equity-oriented funds. They have a lock-in period of 3 years, which is much lesser when compared to other Tax Saving Investments counterparts such as PPF and NPS. As this mode of investment comes under Section 80C of the Income Tax Act, 1961, it helps investors save up to ₹1,50,000 of their income from taxes. Click here to know more about ELSS.
Investing lump sums in ELSS funds in the last quarter can lead to two problems:
Markets are volatile in general. If you are planning to invest in the last quarter, you might be forced to invest at higher valuations.
Lumpsum investments tend to create a dent in your pocket. SIPs, on the other hand, will not only diversify the investments but also help you invest smaller amounts at regular intervals.
Change in trend:
But now, the trend is changing. People are starting to invest in expert recommendations. Instead of starting Tax Saving Investments only when the need arises, they are doing it in an organized and educated manner.
ELSS schemes invest in equity-oriented funds. As “long” is the name of the equity game, it is better to start your investments early in the financial year than wait until the last quarter. In addition, holding SIPs would not only regularize the investments but also reap the benefits of rupee cost averaging.
As FundsIndia’s Head of Research, Arun Kumar, quotes, “The markets are volatile and the outcome/returns made in the past year may not reflect in the current year. In order to plan your tax saving better, start early and distribute your investments through SIPs.”
Better planning = better results! So, plan and start your tax-saving investments this quarter.
Investments can be made anytime during the financial year to gain this deduction. However, to assess your tax burden, employers might ask you to submit your tax planning a few months prior to the financial year-end. And this is typically the time when investors rush to make their investments. The following graph shows how much of the money invested in equity mutual funds goes towards ELSS funds. The data has been taken month-wise.
Spike in the inflow of Tax Saving Investments in ELSS funds
The trend is clearly visible. Each year, there is a small spike in inflows in February, followed by a bigger spike in March, followed by a steep decline in April.
Investors put more money in ELSS funds during the month of February and March. The data confirms what financial advisors already know – most people don’t think about tax savings until the end of the year. However, there are two problems with this approach.
First is the problem of picking the wrong product to save taxes. Insurance and bank salesmen are especially active during these months. Because you don’t have time to carry out due diligence on the recommended products, you often go by the words of the salesmen. Consequently, you might end up buying insurance policies you don’t need or put your money in poor returning bank FDs and PPF. By picking these products, you will forego gains which are higher than the amount of tax saved. As this article demonstrates, ELSS funds are the best product for your tax saving needs.
Even if you don’t make any mistakes in choosing the right product, there is a large element of timing risk when you invest in market-linked products like tax-saving funds. And that is the second problem with the end-of-the-year approach to tax saving investments.
We analyzed fund returns for a SIP of Rs. 5,000 through April to March every year and compared it to a lumpsum investment of Rs. 60,000 in March every year over the last 5 years. The following graph shows the difference between SIP and Lumpsum values based on various starting dates. These values are based on investments in the Tata India Tax Savings Fund. Fund selection is only for illustrative purposes and should not be taken as a recommendation.
Value of tax saving ELSS investments
Even though the graph shows only four dates, the SIP outperforms the lumpsum approach on all dates. Please note, dates beyond 28th have not been considered as SIP is not available on those dates.
So setting up a SIP helps you avoid the last-minute rush while also making more money from you. It also:
Saves you from missing the 31st March deadline
Reduces the chances of you not having enough money when you want to invest
Prevents you from putting your money in an ill-suited financial product
But if your employer has issued a deadline now to show your tax prove and you don’t want the hassle of claiming it all when filing, here’s what you can do: invest a lump sum needed for your tax proof and start a SIP. This way, you will ensure that you start the process for future Tax Savings Investments right away and also take advantage of the present market turbulence, especially pre-elections.
One such strategy that helps with tax saving is ELSS (Equity Linked Saving Schemes). These schemes invest in Equity-oriented funds. They have a lock-in period of 3 years, which is much lesser when compared to other Tax Saving Investments counterparts such as PPF and NPS. As this mode of investment comes under Section 80C of the Income Tax Act, 1961, it helps investors save up to ₹1,50,000 of their income from taxes. Click here to know more about ELSS.
Problems with planning at the last minute:
People’s attention moved towards tax-saving instruments as time passed. But earlier, the way they chose their attention to turn was hasty, unfortunately. Only when they had to file their taxes, their concentration moved towards such investments. From the graph below, it can be seen that a pile of investors entered the ELSS scene only in the last quarter of the financial year.SIP and Tax Saving Investments
Though it helped them save taxes, the returns and the investment behavior would not have been disciplined.Investing lump sums in ELSS funds in the last quarter can lead to two problems:
Markets are volatile in general. If you are planning to invest in the last quarter, you might be forced to invest at higher valuations.
Lumpsum investments tend to create a dent in your pocket. SIPs, on the other hand, will not only diversify the investments but also help you invest smaller amounts at regular intervals.
Change in trend:
But now, the trend is changing. People are starting to invest in expert recommendations. Instead of starting Tax Saving Investments only when the need arises, they are doing it in an organized and educated manner.
ELSS schemes invest in equity-oriented funds. As “long” is the name of the equity game, it is better to start your investments early in the financial year than wait until the last quarter. In addition, holding SIPs would not only regularize the investments but also reap the benefits of rupee cost averaging.
As FundsIndia’s Head of Research, Arun Kumar, quotes, “The markets are volatile and the outcome/returns made in the past year may not reflect in the current year. In order to plan your tax saving better, start early and distribute your investments through SIPs.”
Better planning = better results! So, plan and start your tax-saving investments this quarter.
The Right Way to Save Tax
Section 80C of the Income Tax Act of India specifies certain investments that allow you to avail income deduction and reduce your tax liability. ELSS mutual fund also known as the tax saving fund is one such specified instrument.Investments can be made anytime during the financial year to gain this deduction. However, to assess your tax burden, employers might ask you to submit your tax planning a few months prior to the financial year-end. And this is typically the time when investors rush to make their investments. The following graph shows how much of the money invested in equity mutual funds goes towards ELSS funds. The data has been taken month-wise.
Spike in the inflow of Tax Saving Investments in ELSS funds
The trend is clearly visible. Each year, there is a small spike in inflows in February, followed by a bigger spike in March, followed by a steep decline in April.
Investors put more money in ELSS funds during the month of February and March. The data confirms what financial advisors already know – most people don’t think about tax savings until the end of the year. However, there are two problems with this approach.
First is the problem of picking the wrong product to save taxes. Insurance and bank salesmen are especially active during these months. Because you don’t have time to carry out due diligence on the recommended products, you often go by the words of the salesmen. Consequently, you might end up buying insurance policies you don’t need or put your money in poor returning bank FDs and PPF. By picking these products, you will forego gains which are higher than the amount of tax saved. As this article demonstrates, ELSS funds are the best product for your tax saving needs.
Even if you don’t make any mistakes in choosing the right product, there is a large element of timing risk when you invest in market-linked products like tax-saving funds. And that is the second problem with the end-of-the-year approach to tax saving investments.
We analyzed fund returns for a SIP of Rs. 5,000 through April to March every year and compared it to a lumpsum investment of Rs. 60,000 in March every year over the last 5 years. The following graph shows the difference between SIP and Lumpsum values based on various starting dates. These values are based on investments in the Tata India Tax Savings Fund. Fund selection is only for illustrative purposes and should not be taken as a recommendation.
Value of tax saving ELSS investments
Even though the graph shows only four dates, the SIP outperforms the lumpsum approach on all dates. Please note, dates beyond 28th have not been considered as SIP is not available on those dates.
So setting up a SIP helps you avoid the last-minute rush while also making more money from you. It also:
Saves you from missing the 31st March deadline
Reduces the chances of you not having enough money when you want to invest
Prevents you from putting your money in an ill-suited financial product
But if your employer has issued a deadline now to show your tax prove and you don’t want the hassle of claiming it all when filing, here’s what you can do: invest a lump sum needed for your tax proof and start a SIP. This way, you will ensure that you start the process for future Tax Savings Investments right away and also take advantage of the present market turbulence, especially pre-elections.
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