Equity-Linked Savings Schemes commonly known as ELSS has been in the light for quite some time. These tax-saving investments have created quite a buzz in the past few decades with more and more investors turning towards these mutual fund investments. However, investors often assume that SIP is the only way through which you can invest in ELSS. They could not be more wrong. One can easily invest in ELSS funds via a lumpsum mode of investment. In this article, we will explore why lumpsum investment can be a good choice to invest in ELSS. But before we dive into that, let’s quickly recall what are ELSS funds?
What is ELSS?
ELSS funds are a type of mutual funds that invest a majority of their assets (at least 80% of their securities) in equity and equity-related instruments. These mutual funds fall under Section 80C investments as they provide a tax deduction of up to Rs 1.5 lac per annum u/s 80C of the Income Tax Act, 1961. As an investor, you can save up to Rs 46,800 per annum by investing in ELSS funds provided that you are in the highest tax slab. This substantially decreases the tax burden on investors. These investment options also have a mandatory lock-in period of three years. As a result, these tax saver mutual funds are believed to offer dual benefits of capital appreciation and tax-saving attributes to investors.
Lumpsum investment in ELSS
When you invest in ELSS through lumpsum, you purchase mutual fund units i.e. worth the investment amount at the then prevailing net asset value of funds or NAV of mutual funds. It is advised to invest in mutual funds through a lumpsum investment when there is low price volatilities in the market. This is due to the fact that the prices of the mutual fund are somewhat similar in such markets, making cost averaging irrelevant. What’s more, as in a lumpsum investment the entire investment amount is invested in one go, the potential of earning significant returns is higher. Additionally, the power of compounding is able to show its magic at an exponential rate.
If you have the entire investment amount at your disposal, it is advised to invest the entire Section 80C tax deduction limit of Rs 1.5 lac in tax-saving investments at the beginning of the financial year. Why? This is because this allows for higher returns as your amount is invested for a longer duration (as compared to investing in tax-saving investments including ELSS tax-saving mutual funds at the last moment). Also, when you make a hurried investment in tax-saving investment options at the last moment, there is a scope of making ill-informed investment decisions that might hamper the returns on your investment portfolio.
The lumpsum mode of investment is ideal for those business owners who have seasonal or irregular sources of inflows of cash. If not that, then you can consider investing in SIP as well as lumpsum depending on your cash inflow, risk appetite, investment horizon, and financial goals. Doing this will ensure that you are not burdened financially and will ensure a stress-free investment in mutual funds. Happy investing!