Equity Linked Saving Scheme can serve as the ideal option for those investors who wish to benefit from tax savings and better returns in the long run. Coupled with a drastic growth in its popularity over the last few years, a large number of misinformation has developed surrounding its operations. Today we are going to educate all potential investors about the advantages associated with making ELSS investments in stark contrast to other tax-saving options such as PPF or NPS.
One of the very first things we enquire about an investment vehicle is the rate of return it promises to shower us with on the passage of a considerable time frame. In comparison to other tax saving options providing between 5-8% return, ELSS funds that invest mostly in equity schemes provide between 10-15% returns. The benefit of compounding joins hands with returns from equity to provide investors with higher returns in the long run. Favorable scenarios arising in the stock market which is highly probable in a growing economy like India can help you in reaping greater returns with a carefully constructed portfolio. Investing discipline as we all know is the key to benefitting out of good returns and this is taken care of in the best way by the three-year lock-in period which paves the path for higher yields.
Related Article : FD vs. ELSS – Where does Mr. Gupta invest and why?
While Public Provident Fund (PPF) comes with a 15-year lock-in period & NPS cannot be redeemed before retirement. ELSS funds on the other hand can be redeemed after the passage of just 3 years which surely is the shortest amongst the financial instruments which qualify for 80C benefits.
Power Of Compounding
Investing discipline as we all know is the key to benefitting out of good returns and this is taken care of in the best way by the three-year lock-in period which paves the path for higher yields. However, for better returns, it is advisable to stick to your investment over a span of 5-10 years.
Mutual fund investment has become highly transparent off late with the inclusion of KYC procedures and investor protection guidelines. Since all mutual fund companies operate under the purview of SEBI and are thus under an obligation to make necessary disclosures, you can be completely guaranteed the safety of your ELSS investment.
ELSS funds can be redeemed after the passage of 3 years from the date of investment if investors are not satisfied with the rate of return. Alternatively, they can carry on with the investment plan with no upper limit on the tenure.
Related Article: Retirement through Equity Linked Savings Scheme
Systematic Investment Plan serves as one of the best available ways of instilling investor disciple through regular investment and ELSS schemes can provide them with the option of benefitting out of the same over the long-term horizon. With monthly investments possible at just 500 INR, you can easily turn your savings into investments by riding on the ELSS vehicle. In this way, a salaried individual can invest a portion of his salary periodically for benefitting out of compounded returns.
The amount invested in ELSS can be claimed u/s 80C as a tax deduction up to the maximum limit of 1.5 lakh INR. In spite of having a lock-in period of three years, ELSS returns are considered as long-term capital gains (LTCG). However, in stark contrast to short-term capital gains (STCG) which is subject to a 15% tax levy, LTCG is subjected to 10% taxation if the gain amount exceeds 1 lakh INR.
ELSS investment is completely paperless in nature thus allowing investors to engage in the same even by using websites or mobile applications. Even payments can be done through debit cards and net-banking after which investors can track, invest further or redeem their investments by sitting at the comfort of their home. ELSS mutual funds is the ideal choice for everyone who wish to save tax while maximizing returns.
Kanika is a 27-year-old, HR Manager in a bank, and is living with her husband Suresh, who is 31 years old, and her newborn baby girl Alia. Kanika wants to make sure that Alia’s future is not compromised on, as she has big plans for her. So she wants to start planning for it now. She approaches her adviser and gives him the relevant details of her plan. After much analysis, he tells Kanika, that she is still young and can have an aggressive investment approach, so why not invest through SIPs? and make use of Power Of Compounding.
Systematic Investment Plans are commonly known as SIPs. They are a fixed amount of regular savings, that go into mutual funds, which are nothing but a pool of funds collected from many investors for investing in stocks, bonds and other money market instruments.
SIP is an investing tool related to mutual funds. It inculcates a habit of disciplined saving. The magic of SIPs do not work overnight, but it works on the investments, collected over the years. This magic of SIPs can be understood if we understand the Power Of Compounding. Why do we water our plants regularly? So that they grow into a beautiful tree, right? It cannot happen overnight, it takes years for it to grow into a tree. Also, it needs to be taken care of every day, for it to grow properly. We can apply the same logic to SIPs. To create a huge corpus, you have to regularly water it with SIPs and over the years, it will grow into the corpus you wish for. This process of growth is called the Power of Compounding.
Power of compounding means earning interest on ‘interest’. Let’s take an example to make it clear, if I invest Rs. 8000/- in a fund, having an interest rate of 12% p.a. (i.e. 1% per month), look at the below table:
|Month||Opening Balance (Rs.)||SIP amount (Rs.)||Interest @ 12% p.a. (i.e. 1% per month)||Closing balance (Rs.)|
From the above table, we can see that the interest per month is not calculated on the SIP amount alone, but on the opening balance as well (which includes the SIP and interest of the previous month). This is how compounding works. So you can just imagine, 10 to 15 years down the line, what the corpus will be.
This table shows, the amounts after 5, 10, 15 and 20 years, with the same amount of the SIP being Rs. 8000/-, @12% p.a. for a term of 20 years:
|After 5 years||6,59,890.9324|
|After 10 years||18,58,712.611|
|After 15 years||40,36,607.996|
|After 20 years||79,93,183.352|
Shocked?? That’s the magic of a SIP of Rs. 8000/-.
To create wealth through SIPs, there is another advantage used, it is called ‘Rupee Cost Averaging.’ This concept is used when the markets are down and advantage can be taken of the situation.
Let us now take a common myth, all investors fear:
Myth: Do not invest when the markets are low, it will cause a loss.
Fact: Invest when markets are down and get more units at a discounted NAV.
Many people believe in this myth and it still prevails today. People fear the fluctuations in the market and keep a watch out, when the market is going to fall, because they do not want to invest at that time. But the fact is, when the markets are down, you get more units at a discounted value. These extra units, will be useful when the market goes up again. This is known as Rupee Cost Averaging.
An example will make the concept clear. If I invest a SIP of Rs 10000/- monthly, and the NAV (Net Asset Value) is Rs. 10, my number of units will be 1000 (10000/10). Now after few months, the NAV drops to Rs. 8/-, my unit will now be 1250 (10000/8). From this we understand, that when the market falls, an investor gets more units at a discounted NAV. So one can just imagine, over the years, how an investor can profit from these SIPs, because at the time of redemption, the market will be high and you will earn more profit on those extra units. This whole process is called Rupee Cost Averaging.
Having said that, this concept is effective only in the case of equity funds, as the rates in the equity market fluctuate from time to time. Whereas debt rates do not fluctuate that much. The Rupee Cost Averaging concept is based only on the constant fluctuations of the market. Hence, the benefit can be availed only if the market is volatile. So for all those investors, who think that they need to keep a close watch on the market, so as to find the right time to invest, can start investing now itself, without having to wait for ‘THE RIGHT TIME’.
These SIPs help in creating wealth to fund your future goals. If they are short term in nature, then it is good to invest in debt funds. But if it’s to fund long term goals, then equity is the right choice. Even if you stop your SIPs, your money will still grow on the amount in your fund. There is a lot of flexibility in investing through SIPs and one of the best investment options.
SIPs are a good option to start investing with, if you are a beginner. You can start with an amount as low as Rs. 500/-. SIPs reduce the burden of having to collect a lump sum first and then invest it. With SIPs, you can invest small amounts every month. You have the flexibility of even increasing your SIP amount. You just need to let your SIPs grow and let the magic of compounding work for you. There’s no right time to invest through SIPs. Now is always the right time.
Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.
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During these volatile markets owing majorly to COVID pandemic, investors are getting panicked as to what should be done with their investments?
Should you be investing more?
Should you be redeeming some of your investments?
Many must be thinking to stop their SIPs during such downfall. Today we are going to address one of the major concerns of whether to continue with the existing SIPs or not.
Let’s start by understanding what SIP is ?
As most of us who are salaried are earning on a monthly basis, it is more convenient for us to invest on a monthly basis. Shelling out a small part of the income at the start of the month is convenient. This is what Mutual funds came up with. SIPs are a way of investing in mutual funds. Instead of investing lump sum at one go which might be difficult for many, mutual funds give us the option to invest on a regular basis which could be monthly, weekly, quarterly, daily, annually etc. But as most of us have a monthly source of income, the majority of investors opt for monthly mode. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in.
SIP i.e. Systematic Investment Plans are a disciplined way to start investing to create wealth for the longer period of term.
It is strongly recommended that you continue with your existing SIPs. Stopping SIPs when the market falls is the worst decision ever.
Let’s understand why?
1. Rupee Cost Averaging
SIP helps to average out cost. You should buy more units of the mutual funds when the markets are down and few units when the markets are up. This is what happens when you invest through SIP and it is called rupee cost averaging.
Let’s first understand what is rupee cost averaging with the help of an illustration.
Assume Mr Ajay bought 1 share of xyz co. at Rs. 100. As an investor, he will be looking at a price higher than 100 so that he can book profits. But instead the market goes down, say the price is now Rs.80. What should he do? As a rational investor, he buys one more share at Rs.80 so now he has 2 shares at a total price of Rs.180 which means the average cost per share is now Rs.90 (180/2). He will now be in profit if the price moves above Rs. 90 as opposed to earlier case where he would be in profit only if the price moves above Rs.100. This is called rupee cost averaging where you average out your cost by investing more at lower price. Now this happens automatically when you invest through SIPs and continues with it.
As you keep on investing more in falling markets, you tend to get more number of units.
How? Suppose you register a SIP of ₹ 1,000 per month in a mutual fund scheme. The first SIP instalment gets invested at NAV of Rs. 20 per unit. As such, 50 units are allotted against the investment. Similarly, if the next month, the markets are under sharp correction and the NAV of the mutual fund scheme falls to Rs. 15 per unit. You get 66.67 units against the monthly SIP investment. Due to additional investment at lower NAV, the average cost would have now fallen to Rs. 17.14 per unit for 116.667 units. This is how the rupee cost averaging helps you, averaging the costs at lower prices when the markets are falling and higher valuation for the overall portfolio when the markets are rising. It is clear that if you continue with SIPs in the falling market, you get more units and it helps you grow your wealth in the long run.
Let’s see one more illustration as how it works in the volatile market in below table:-
|Months||SIP Amount||NAV||Units = Amount /NAV|
After 12 months of SIP investment, the portfolio valuation will be 76018.48. (3455.39 units x 22 NAV). If a person would have made an investment in lump sum, his investment of 60000 would have become only 66000. There is a saving of approx. 16000 just by doing SIPs and continuing the same even in the volatile market.
As seen in above illustrations, it is evident that it is important to continue with your SIPs even if the markets are volatile.
2. Long term Goals
Always remember that you started these SIPs to achieve your long term goals so you will have to be patient and give your investments time to accumulate more when the markets are trembling and then reap the benefits later when markets soar.
3. Power of Compounding
SIPs are the disciplined approach to investment which gives you the benefit of power of compounding without hurting your pocket all at once. For eg, a monthly SIP of just 5000 done for 30 years at an average return of 12%p.a. will give you 1.76 crore. I am sure you would not want to disrupt the magical effect of power of compounding on your investments by stopping it in between.
4. Investment discipline
It helps you to remain committed to your investments. Once you have set up the SIP by selecting the amount and time period, you don’t have to do anything. You just have to make sure the money is available onSIP date in your bank account. Otherwise you will always have something or the other expense come up and investment will take a backseat. So it’s in your best interest to make it automatic by starting Sips. There is no benefit in stopping the same.
5. Looking at the past
What we learn from past experiences? Whenever the market has fallen, it has regained. Investments done during uncertain times, often tends to yield good returns over the next one year. Be it SARS outbreak in 2002-2003, when markets rallied around 32% the next year or be it 2008 global recession, where the market was up by approx 75%. The bear phase happened around 10 times in the past 22 years and every time it lasted not more than 11-19 months and recovered with double digit returns 90% times. It’s been proved that ones who stayed invested and continued SIPs were big gainers and ones who stopped sips and redeemed their investments turned out to be the biggest losers. Now you choose, what you want to be?
I hope you now must have realised the importance of continuing with your SIPs looking at the above reasons. We understand this pandemic too shall pass. It is suggested to remain calm and not stop your SIPs. Keep investing!