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Why to settle for just one when you can get Triple benefit through ELSS?

ELSS= Tax Saving + Wealth Creation + Retirement Planning

If you look at the various investment options under Section 80C of Income Tax Act 1961, you will observe that many of these investments are meant to serve your retirement planning needs in addition to tax savings. Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), life insurance policies (both traditional and unit linked), National Pension Scheme (NPS) etc. are all tax saving investments which are also associated with long term financial planning like retirement.

Equity Linked Savings Scheme (ELSS), another popular Modern investment option under Section 80C, is often perceived to be an investment scheme that matures in 3 years. In this blog, we will discuss about Modern tax planning avenue -ELSS which can also serve long term investment needs especially retirement planning.

Historically, in India, there was a preference for physical assets (e.g. land, property, gold etc.). Among financial assets, traditionally investors preferred risk free investments like bank fixed deposits, Government small savings schemes etc. This preference extended also to Section 80C investments also. As a result employee provident fund, public provident fund (PPF) and traditional life insurance policies have been the investment options, commonly associated with long term investments in India. But can risk free investments meet your retirement needs?

There is a thumb rule in retirement planning called the 30 – 30 rule. The 30 – 30 rule in very simple terms means that you have 30 years of working life, in which you earn, save and invest enough to provide for your 30 years of retirement. The rule sounds simple and obvious, but its implications make retirement planning a serious challenge.

ELSS for wealth creation

It is possible to get a high rate of return on your investment, if you are ready to take risks. Historical data shows that equity is the best performing asset class in the long term. Among the 80C investment options, mutual fund Equity Linked Savings Schemes (also known as ELSS) have given the highest returns over long investment tenures.

ELSS is a mutual fund equity scheme that qualifies for tax savings under Section 80C up to a limit of Rs 1,50,000. An ELSS is essentially a diversified equity scheme with a lock in period of three years from the date of the investment. If you invest in an ELSS through a systematic investment plan (SIP), each investment will be locked in for 3 years from their respective investment dates. Compared to other retirement planning investments under Section 80C,ELSS offers higher liquidity and potentially superior post tax returns.

SIPs in top performing ELSS funds have given around 20% or more compounded annual returns in the last 10 years; if you had invested Rs 5,000 monthly in top performance ELSS funds through SIP, you could have accumulated Rs 15 – 18 lakhs with a cumulative investment of just Rs 6 lakhs in the last 10 years. The last 10 year period in equity markets included three bear markets, in 2008, in 2011 and in 2015 – 2016; therefore, we can conclude that the ELSS returns over the last 10 years were not biased by bull markets.

Equity Linked Savings Schemes (ELSS) are one of the best tax saving investment options as they offer investors triple advantage of superior long term returns, friendlier tax treatment of maturity corpus and higher liquidity.

In the blog post, we will discuss some common mistakes which ELSS investors must avoid.

[1] Do not make your ELSS investment at the end of the financial year:
If you wait till the final month or quarter of the financial year to make your tax saving investments, then you will lose a lot of returns. Let us discuss this with thehelp of an example-

Suppose you have to make Rs 1 Lakh of tax saving investment in ELSS Mutual Funds every year for the next 12 years. What will be the maturity corpus after 15 years (when the lock in period for the last investment ends) assuming 15% annualized returns and no redemptions in the interim? If you make your ELSS investments at the end of every financial year, your maturity amount will be Rs 44 Lakhs. On the other hand, if you make your ELSS investments at the beginning of every financial year, your maturity amount will be Rs 50 Lakhs. You should try to make your tax savings investments at the beginning of the financial year to maximize your returns. If you do not have sufficient lump sum funds at the beginning of the financial year, then monthly Systematic Investment Plan (SIP) will be the best option for you.

[2] ELSS is not just for tax savings:
Tax savings should not be the only objective of investing in ELSS Mutual Funds. ELSS Mutual Funds invest in equity securities and as such,are subject to market risks. There may be periods when ELSS will give negative returns, but over a long investment horizon equity as an asset class is likely to give much higher returns than fixed income (the Sensex gave 16% annualized total returns in the last 10 years). Your investment decision should not be dependent on prevailing market conditions. You must invest in ELSS according to your risk appetite and be prepared to hold for a long period of time to create wealth.

[3] Do not redeem immediately after the lock-in period unless you need money: ELSS has the shortest lock-in period (three years) among all 80C tax saving investment options. However, this does not mean that you should redeem immediately after the lock –in period, unless you need money for some other financial needs, you should remain invested in your ELSS Mutual Fund investments till your wealth creation objective is met. The longer you remain invested, the more wealth you will be able to accumulate.

[4] Do not select ELSS funds based on short term performance: Many investors select mutual fund schemes based on the last 1 or 2 year performance or based on Google showing current top performing schemes. Mutual fund returns for a particular period are dependent on a variety of market driven factors and the fund manager’s investment strategy, in co-ordination with market conditions prevailing at that period in time. A scheme which gives high returns in the short term may not necessarily be able to sustain it when conditions change. Investors should always contact Wealth Advisor for ELSS Mutual Funds selection as their Long-term experience of Market situation can help your money grow with Good potential based on the long term track record of the scheme and the fund managerdetails knowledge with many other factors.

ELSS – Investment Rationale:

1. Better Inflation Adjusted Returns
Equity is the only Investment option which has potential to generate Real Positive Returns which are Inflation Adjusted. As Inflation in a long period can EAT INTO YOUR RETURNS.
For Example, Higher Education cost in 2000 was around Rs. 3,00,000 whereas the same Higher Education cost is around Rs. 20,00,000 in 2019.This is called inflation which gradually with time reduces the value of money.

2. Wealth generation over a Long Term
Equities is the best source of Investment which can help generating WEALTH over a long term.

3. Professional Management
ELSS is the only Investment option which is having qualities of Active Portfolio management with an objective to Reduce Volatility and Generate Alpha (Profits).

ELSS- Key benefits :
1. Lower Lock in Period

ELSS currently has the lowest lock-in -period (three years) among all Tax Saving Investment avenues under Section 80C of Income Tax Act,1961.

2. Operational Ease
Investments can be made either in Lumpsum or Systematically. (SIPs)

3. Power of 3
ELSS Investment is providing 3 powerful benefits :
Tax Saving + Wealth Creation + Retirement Planning over a long term

4. Blend of Growth and Value
Investors can get benefit form BLEND INVESTMENT STYLE/Diversified Investment. (Combination of Growth and Value)

Conclusion
The important takeaways form this ELSS Blog will be :-
• Start your tax planning early and make your tax saving early in the year or through monthly SIP.
• Invest according to your risk appetite and be prepared for intermittent volatility.
• Redeem only when you need money irrespective of lock-in status and be prepared to remain invested for the long term.
• Select ELSS Mutual Funds as per Wealth advisor’s advice.

Before you Invest, Once think

You do so much more everyday than just your job/business. But does your Tax-saving instrument do more than just save tax?

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Mutual Fund SIPs and power of compounding

Share market decision making is not everyone’s cup of tea but it can be achieved with great experience. While multi-beggar stocks have created wealth for investors, these stocks are very difficult to identify by average retail investors, more so at the right price – the endeavour to create wealth by investing heavily in stocks that you expect to multiply 10 – 15 times can be risky. The secret to wealth creation is actually much simpler, the power of compounding. Let us discuss in this blog post regarding Systematic Investment Plan(SIP) and Power of compounding benefits and why the same is essential in today and tomorrow.

What is power of compounding?

Power of compounding is essentially making your money work for you. Think about a daily wage laborer – if he works for 300 days, he will get more money than if he works for 100 days. Your money, if invested wisely over a long investment horizon, is like a daily wage laborer; every extra day your money works, will get you incremental money. Let us now understand it from a theoretical perspective.

Money when invested earns returns – how much returns it earns, depends on the asset class and asset type. Historical data shows us that, equity is the best performing asset class in the long term. Returns earned by your investments get added to your investments and the overall amount earns higher returns.

Let us assume you invested Rs 10 lakh @ 15% returns. After 1 year, you will make a profit of Rs 1.5 lakhs. This profit, unless it is withdrawn, will get added to your investment and your investment amount will be Rs 11.5 lakhs. In the second year, at the same rate of return, you will make a profit of Rs 1.72 lakhs, more than what you made in year one. This profit of Rs 1.72 lakhs will get added to your investment and your investment amount at the end of year two will be Rs 13.2 lakhs. In the third year, at the same rate of return, you will make a profit of Rs 1.98 lakhs. The chart below shows the cumulative profit growth every year.

You can see that the profit growth is not linear but exponential. By year 5, the cumulative profit is more than your investment amount. By year 8, the cumulative profit is more than double your investment amount and by year 10, the cumulative profit is more than three times your investment amount.

SIP and the power compounding

Power of compounding is not as much about what you buy and how much you buy, as it is about how you buy and how you manage. Sounds confusing? Let us illustrate with the help of an example.

Let us assume that you invest Rs 10 lakhs in lump sum in a mutual fund, which will give 20% CAGR returns, for 10 years. 20% CAGR over 10 years, is a pretty aggressive assumption, but for the sake of the argument, let us assume you were lucky enough to invest in such a fund. What will be your investment value after 10 years? Rs 62 lakhs, more than 6 times returns in 10 years, which is quite impressive.

Let us now assume, you invest Rs 30,000 every year over the next 30 years – in total, you invest Rs 9 lakhs. Let us further assume that you get a CAGR return of 15% over 30 years. What will be your investment value after 30 years? Rs 1.5 Crores, nearly 2.5 times what you got by investing in lump-sum, that too by investing Rs 1 lakh less and at lower annualized returns. The chart below shows the cumulative profit growth for annual investments.

Investing is not just about money, it is more about time. This is the essence of power of compounding. The power of compounding is more magnified in SIP, because you can start with a smaller amount, invest regularly and remain invested longer.

Let us take this example further. You got Rs 1.5 Crores by investing Rs 9 lakh over 30 years (Rs 30,000 per annum) versus Rs 62 lakhs by investing Rs 10 lakhs in lump sum over 10 years. Let us now assume that, instead of investing Rs 30,000 on an annual basis, you spread the same annual amount over 12 months, in other words, you invest Rs 2,500 per month over the next 30 years. The tenor of investment remains the exactly the same to what it was when you were investing annually, but what will be your investment value after 30 years? Rs 1.75 Crores, which is Rs 25 lakhs more than what you got from the same investment capital, over the same tenor!

You got the extra returns because you were investing monthly instead investing annually – this again is a demonstration of the awesome power of compounding. By investing on a monthly basis you made your money work harder (instead of being idle throughout the year).The chart below shows the cumulative profit growth for annual investments.

Regularity of Investments:

SIP regularizes investments by making it a disciplined Investment process which is what it is supposed to be. It removes human judgment from the decision making process. It instillsdiscipline in the investor and helps him stay focused, investing regularly for the long term.

Rupee Cost Averaging

Apart from the power of compounding, SIPs enjoy another major advantage, especially in equity mutual funds. Equity as an asset class is intrinsically volatile – prices move up and down on a daily basis.
By investing through mutual fund monthly SIPs, you will be able to take advantage of volatility by investing at various price levels. This is known as Rupee Cost Averaging. Over long investment tenors, asset prices will follow a secular trend (unaffected by short term volatility). Therefore, rupee cost averaging of purchase price can help you get enhanced returns in the long term.

One must continue SIP in lower or Higher market situations. Never try to time the market, only provide 5 years and more and returns will be astonishing.

Conclusion

Power of compounding is simple to understand, but we often do not realize its potential. Understand the importance of power of compounding in wealth creation. Once you get a sense of the potential of compounding, you will realize that you can have considerable control over your financial destiny – more than what you would have imagined earlier. It is essential to get benefit of SIP investment to cope of with Modern Life style expenses and it will become necessity in future, then why should you wait when others have already started SIPs considering its magic ?
All that is required on your part is patience,discipline and Stay invested as per our advice.

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