(This article was first published on Yahoo Finance.)
The month of October will mark the beginning of the third quarter of the financial year. This means you will have only 6 months left in the year to invest in tax-saving instruments like ELSS funds. But a lot of people will think that even 6 months is a lot of time.
Generally, tax-savers tend to make their tax-saving investments only in February and March when they have to submit investment proofs. But those investments will be made in haste and might not turn out to be as meaningful as they should be. The purpose of tax-saving investments in ELSS funds shouldn’t be only to save taxes, they should be used to achieve long-term financial goals as well.
This is why you need to plan out your investments well before the due date of 31st March. Ideally, you should begin investing at the start of a new financial year itself, but don’t be concerned if you didn’t do that. You can still make use of the coming 6 months to fulfill your tax-saving obligations and get the best out of your ELSS fund investments.
The first thing you should do is figure out how much of the Rs 1.5 lakh Section 80C limit you have to invest in ELSS funds. To do this, you need to first look at the 80C deductions that you are already putting money in. These include your annual life insurance premium, PPF contribution, home loan principal repayment, children’s school tuition fees, etc. These are the investments and expenses you make anyway and once you have information about them, you will be able to see how much of the Rs 1.5 lakh is left to invest in ELSS funds.
Let’s suppose you have Rs 1 lakh of the 80C limit left to invest in ELSS funds. The mistake you shouldn’t make here is investing that entire amount in one go. Equity-based investments earn higher returns when they are spread out over a period of time. This is why systematic investment plans (SIP) are recommended by experts. What you should do is divide the amount you want to invest in ELSS funds for this financial year into 6 parts and invest it every month from October to March. This will allow you to benefit from rupee cost averaging and purchase fund units at different levels of the market. It will also allow you to make sure that you don’t catch a market peak.
Once you have the exact amounts to be invested, you can split it across more than one ELSS fund to benefit from diversification and different investment styles. A portfolio of 3 ELSS funds would be ideal for most tax-savers. Pick ELSS funds on the basis of their historic performance. A fund that has done well over different market cycles would be best placed to navigate the uncertainties of the equity markets in the future. Furthermore, investing in more than one fund cushions your portfolio against the underperformance of any one of your funds.
Of course, before you invest in ELSS funds, you need to understand that they don’t guarantee returns. These tax-saving mutual funds invest in equities and are susceptible to equity-related risks. But they make good investment options because they have a lock-in of only 3 years and the equity exposure can help beat inflation in the long run.
ELSS funds should be a part of most tax-savers’ investment portfolios. When your investments in them are properly planned out, they provide the dual benefit of tax saving and long-term wealth.