Although there are multiple financial schemes for Indian investors to choose from, these days most investors turn to mutual funds to achieve their lives financial goals. even investors who have been relying on conservative investment avenues and not shifting to Mutual Funds because of their high risk reward ratio and the superior capital appreciation that these market linked schemes are offering. The beauty of mutual fund investments is that investors do not need to have a large sum gum sum surplus cash at their disposal to invest. Thanks to a convenient investment option like a SIP (systematic investment plan) investors can now build wealth over the long-term through systematic and disciplinary investing. 

What is SIP?

Earlier the only way to invest in mutual funds was by making a one time lump sum payment. investors were allotted units in quantum with the investment amount and depending on the fund’s as its existing net asset value (NAV). However lump sum investment has its own downside. When you make a lump sum investment you end up exposing your entire finances to the dangers of equities. We all know that equity markets are volatile in nature and there is a chance of your portfolio in current losses thus affecting your entire investment amount.

Thanks to systematic investment plan investors now have the liberty of making small systematic payments at periodic intervals instead of making a one-time lump sum investment. SIP is an easy and convenient way to invest in mutual funds. If you are a KYC compliant individual, you can invest in mutual funds to escape from the comfort of your home or office using a smartphone or laptop with a decent internet connection. All investors must do is complete a one time and date with their bank following which every month on a fixed at a predetermined amount will be debited from the savings account and electronically transferred to the desired mutual fund. 

SIP for long term goals?

SIP investments are known to offer capital appreciation over the long term. This is the reason why several investors consider starting and mutual fund SIP so that they can target their life’s monetary needs. There are several benefits that investors can avail if they start on a mutual fund SIP. The biggest advantage mutual fund investors have through SIP investments is that their finances stand a chance of benefiting from the power of compounding. the small payments that investors make towards the mutual fund investment, they can multiply over the long term and transform into a large corpus through compounding. In mutual funds, compounding refers to the interest earned from the interest earned from the initial investment amount. Whenever a mutual fund scheme on profits these gains are invested back in the scheme. Over a period, the interest earned on the initial investment keeps on earning interest depending on the market movement. if you have long-term financial goals like building a retirement Corpus for buying a weekend home or if you want to give your daughter at destination weddings or if you want to send children abroad for overseas education and then all these goals can be made through long-term SIP investments. Another advantage of investments is that it allows the appreciation of rupee through rupee cost averaging. when that asset value of a mutual fund is low or more units are allotted to the portfolio. similarly, when the net asset value of a fine is hi lessons are allotted and adjusted depending on the SIP investment amount. This allows for a rupee cost averaging in his known to benefit one’s investments over the long term.

Investments in mutual funds may offer capital appreciation for investors who are expected to consult a financial advisor before investing.

Equity Linked Savings Scheme, widely popular among Indian investors as ELSS is the only mutual fund scheme that comes with a tax benefit. ELSS can be considered as a modern investment tool to save tax and earn capital appreciation over the long term. Earlier, the Indian investors had only conservative tax saving schemes to choose from. These conservative tax saving instruments came with a lengthy lock-in periods. Furthermore, the interest rates that these schemes offered was always on the low end. With such low fixed interest rates, one might fall short of achieving their life’s long term financial goals. But thanks to the introduction of ELSS, investors can now expect high capital appreciation. Also, ELSS comes with a short lock in period. ELSS fund investors cannot redeem or withdraw their funds for a minimum period of 36 months from the date of investments. That’s because ELSS comes with a predetermined lock in period of 3 years. Having said that, this is probably the shortest lock in as compared to other tax saving instruments.

In order to understand how ELSS works here’s an example:

Madhavi Mehta is a data scientist with a gross annual income of Rs. 12.75 lakhs. This lands Madhavi in the 30 percent tax slab. After learning from her HR that she needs to submit tax investment proof, Madhavi decides to invest Rs. 1.5 lakhs in ELSS fund. According to Section 80C of the Indian Income Tax Act, 1961 one can invest up to Rs. 1.5 lakhs in ELSS and claim tax deductions for the same. Thus, by investing in ELSS, Madhavi’s gross taxable income has come down to Rs. 11.25 lakhs. Thanks to ELSS, she was able to bring down her tax liability.

Things to consider before investing in ELSS. Are ELSS risk free?

ELSS is an equity oriented scheme which means the fund predominantly invests (minimum 80 percent) in company stocks and other equity related instruments. Thus, one can say the ELSS is a high risk portfolio carry mutual fund scheme. However, every scheme carries some amount of risk with also. Also, if you are investor with a short term investment horizon then you might be exposing your finances to market’s volatile nature. Mutual funds like equity funds tend to get affected by daily market fluctuations. However, over the long term these investments have shown positive outcome. If you invest in ELSS with a long term investment horizon, not only will you have to not worry about the market vagaries, but your investments might also succeed in overcoming inflation. 

However, before investing in this tax saver fund it is better that you determine your risk appetite. You can even consult a mutual fund expert or a financial advisor who might be able to help you determine whether you hold the appetite for risk for investing in ELSS. There are multiple ways to invest in ELSS. You can either make a onetime lumpsum investment or you can opt for a SIP. A lumpsum investment in ELSS is made by deciding an amount and investing this amount right at the beginning of the investment cycle. SIP (Systematic Investment Plan) on the other hand, gives investors an opportunity to make small investments at regular intervals.  Opting for a SIP in ELSS with a long term investment horizon can even reduce the overall risk of the investment. Every month on a fixed date, a predetermined amount will be debited from the investor’s savings account and electronically transferred to the ELSS fund. This allow minimum exposure to market risk as compared to lumpsum investment.

Although ELSS investments aren’t risk free, they do offer a tax benefit and capital appreciation over the long term.