March 31st is just 15 days away. When it comes to taxes, this remains a holy deadline. If you are the kind who loves postponing, well almost everything….pay heed…Keep at least 2 or 3 days as a buffer to finish all tax related jobs. Don’t wait for the March 31st deadline. Equity linked savings schemes popularly called ELSS, are an excellent way to save tax. You love investing in ELSS because it not only saves tax; it also has the potential to give good returns.
So what are equity linked savings schemes? Equity linked savings schemes are equity diversified mutual funds which invest most of your money in stocks. An investment in stocks gives high returns but at high risk. Invest in ELSS only if you willing to bear risk. ELSS has a lock-in of 3 years (You need to stay invested for at least 3 years). Why ELSS is a great investment to save tax? Simple….It enjoys EEE benefit. The money you invest enjoys a tax deduction up to INR 1.5 Lakhs a year, under Section 80C of the income tax act. The returns you get and the money you withdraw at maturity (after 3 years) are tax free.
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1. Invest in ELSS early
This advice might be a bit too late this year, but no problem. Better late than never. Now, you have no choice but to invest a single large amount (lump sum) in the ELSS. It is good to invest in ELSS through an SIP (Systematic Investment Plan). SIP is a method of investing in ELSS, where you regularly invest (say once each month), small amounts of money. ELSS invests your money in stocks. (Stocks move up and down depending on the economy).
If you invest through SIP, you invest both at higher market levels and lower market levels, which balances your investment.If you invest a lump sum amount in ELSS at the last minute, you could be investing when the stock markets are high. You also don’t have any time to do your research.
2. Invest in ELSS based on long term performance
When you choose to invest in an ELSS scheme, do not just go by the recent performance. Investing in an ELSS scheme just by looking at the last 6 months or 1 year performance, could be a terrible mistake.
Always look for consistency when you invest in an ELSS scheme. The ELSS scheme you plan to invest your money, must be a consistent performer for at least 3 to 5 years.
3. You redeem the ELSS just after the lock-in
Can’t wait for the 3 years to pass and redeem your ELSS investment? Yes…ELSS has a 3 year lock-in, where you can’t touch this investment for 3 years. Just stop for a moment and think….This lock-in might actually be good for you.
You need to stay invested in equity (stocks or equity mutual funds), for at least 3 to 5 years, to get good returns. The lock-in of 3 years gives you a very good chance to get these returns. So don’t rush to redeem your ELSS just yet. Stay invested for maybe 5 to 7 years and pocket great returns.
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4. Don’t invest in too many ELSS Schemes
Do you invest in a new ELSS scheme each year? A very bad idea. It is very difficult to monitor the performance of all these ELSS Schemes.Stick to an investment in just 2 or 3 ELSS schemes. You can easily do your research and pick good ELSS schemes. Then stick to these schemes and keep investing in them.
Yes, its tax time. ELSS is the flavor of the season. It’s time to invest in ELSS and save tax. ELSS not only saves tax, it also grows your money. Don’t just invest in ELSS for the tax benefits. ELSS invests your money in stocks and this is risky. Though you could get great returns, invest only if you are comfortable with this investment.
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