ELSS, also known as Equity-Linked Savings Schemes have been in the spotlight for quite some time among retail investors. Several investors invest in ELSS to benefit from the several advantages offered by these mutual fund schemes. However, several investors fall a prey to the common misconception that one can invest in ELSS funds only through SIP (Systematic Investment Plan) mode of investment. They cannot be more wrong. One can also invest in ELSS mutual funds through lumpsum mode of investment. Let’s understand why lumpsum investment in ELSS might be a good choice for your investment portfolio. But, before we get to that let’s understand what ELSS mutual funds exactly are.
What is ELSS?
ELSS funds are a type of equity funds that are mandated by the Indian markets’ regulator – SEBI (Securities and Exchange Board of India) to invest at least 80% of their assets in equities and equity-related investments. As per Section 80C of the Income Tax Act, individuals and Hindu Undivided Families (HUF) are eligible for a tax deduction of up to Rs 1.5 lakhs every year. You must note that if you belong to the highest tax slab, you can save as much as Rs 46,800 per annum by investing in tax-saving investments. ELSS tax saver mutual funds offer dual benefits of wealth creation and tax-saving opportunities to investors.
How lumpsum investment in ELSS tax saving mutual funds can be a good choice?
Before we understand how lumpsum investment in ELSS mutual funds could be beneficial for your investment portfolio, let’s understand the workings of ELSS funds. When you invest a lumpsum amount in ELSS tax saver mutual funds, you purchase units worth the investment amount at the prevailing NAV (net asset value) of the fund. Hence, the returns yearned on any mutual fund investment is heavily dependent on the growth of the NAV of mutual funds.
Now, coming back to the topic, a lumpsum investment could be an ideal mode of investment when the markets are experiencing low volatilities. Why, you may wonder. Well, the reason is simple – when the NAV of the mutual fund is somewhat stable or steady, the feature of rupee cost averaging becomes immaterial in such circumstances. Note that rupee cost averaging is a popular feature of SIP investments. What’s more, as an investor ends up investing the entire sum of money in lumpsum investment, the potential to earn significant returns is substantially higher. The power of compounding also helps to multiply returns of the ELSS funds at an exponential rate. You can also use a lumpsum calculator to assess the future returns on your mutual fund investments.
Note that whether you decide to invest in lumpsum or go forward with the SIP mode of investment, you must ensure that the objectives of your ELSS investments are in line you’re your financial goals, investment duration, and risk profile. Happy investing!