Let’s begin this article with a simple word, GOAL. What’s a goal? A goal is a target which you set. It’s something you want to achieve. When your goal involves money, it becomes a financial goal. A financial goal can be short term, medium term or long term. You want to go on a trip abroad within a year. This is a short term goal. You want to buy a car within 4 years. This is a medium term goal. You are investing for retirement, which is 20 years away. This is a long term goal.
ELSS can be an excellent investment to meet long term financial goals like retirement. An investment in ELSS not only helps your money grow, it also helps you save tax. Want to learn how ELSS helps you in financial planning? Just read on.
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Equity linked savings schemes popularly called ELSS, invests more than 80% of your money in equity. It is essentially a diversified mutual fund equity scheme. An investment in equity can be risky. An investment in equity is subject to market conditions, which makes it very volatile in the short term. Invest in ELSS, only if you are capable and willing to bear risk.
Invest in equity only if you are willing to stay invested for the long term. For an investment in equity to give good returns, you need to stay invested for at least 3 to 5 years. ELSS has a lock in of 3 years. You cannot withdraw your money from the ELSS for 3 years. You are forced to stay invested, which is actually a good thing.
You are most likely to get good returns from an ELSS, as you are a long term investor. Invest in ELSS only for financial goals which are more than 3 years.
ELSS enjoys E-E-E benefits. You must be wondering what’s E-E-E benefits? E-E-E means your investment is exempt from tax at the time of investment, during the investment tenure and also on maturity.
You get a tax deduction up to INR 1.5 Lakhs a year, under Section 80C of the income tax act. Your money may grow during the tenure of the investment and this is not taxed. The money you withdraw at maturity after 3 years, is not taxed.
It’s best to invest in equity at a young age, especially if you are investing for retirement. Your investment has time to grow. You will have a good amount at retirement. ELSS which has a huge equity component, helps you achieve retirement goals.
Invest in ELSS through SIP (Systematic Investment Plan). SIP is a way of investing in mutual funds. You invest small amounts of money regularly (say once each month), in the ELSS scheme. Over time, you have invested a lot of money in the ELSS scheme.
You can also save tax without making any fresh investment in the ELSS. You invest for 3 consecutive years in an ELSS scheme. In the fourth year, you can redeem the amount you have invested in the ELSS in the first year (The 3 year lock in has expired). You book the profit (keep the gains you have made for yourself from the ELSS). You reinvest the capital in the same ELSS scheme or another ELSS scheme. You get a tax deduction under Section 80C and you don’t need to make any fresh investment for the fourth year. This method works, only if stock markets are doing well.
ELSS is an excellent way to attain financial goals. It also helps save you tax.
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