Building Wealth While Saving Tax: A Simple Guide to SIPs in ELSS

What is an ELSS?

ELSS is a mutual fund that invests mainly in the stock market. What makes it special is that it comes with a tax benefit under Section 80C of the Income Tax Act. You can invest up to ₹1.5 lakh per year and claim a deduction on your taxable income. That is the money you don't have to pay tax on, which can save you anywhere from ₹15,000 to ₹46,000, depending on your tax bracket.

Unlike mutual funds, ELLS cannot be redeemed. Your funds get locked for three years and you can't withdraw them during this period. However, amongst all tax-saving instruments, this is the shortest duration. Compared to the Public Provident Fund's 15 years or the National Savings Certificate's 5 years, the tax-saver fixed deposit is 5 years and ELSS starts looking flexible.

Why Use SIP for ELSS?

Now, you could invest a lump sum in ELSS by investing ₹1.5 lakh all at once in March to save taxes. But a SIP offers a smarter approach. With SIP, you invest a fixed amount every month, like ₹5,000 or ₹10,000, instead of one big chunk.

The beauty of this method is that you don't need to worry about market timing. When stock prices are high, your monthly investment buys fewer units. When prices drop, the same amount buys more units. Over time, this averages out your purchase cost, which financial experts call rupee cost averaging.

The Discipline Factor

We often see our friends and relatives, come March and so many of us are scrambling to make last-minute tax-saving investments. SIPs solve this problem by automating your investments. Once you set it up, a fixed amount gets deducted from your bank account every month. You don't have to remember, you don't have to decide and you are automatically doing the financial planning by investing and saving taxes.

Starting Small, Thinking Big

With SIPs, you can start with humble amounts. Many ELSS funds accept SIPs starting at just ₹500 per month. This makes it convenient for almost everyone to invest in. A young professional, a freelancer or even a student with some income can invest without feeling the pinch.

Understanding the Risks

ELSS being linked to equity has risks. ELSS invests in stocks, which means there are no guaranteed returns. The stock market goes up and down and your investment value will fluctuate accordingly. Some years you might see good returns of 15-20%, while other years might be single-digit returns.

However, historically, equity investments have outperformed most other tax-saving options over longer periods. The three-year lock-in works in your favour here. It forces you to stay invested through market ups and downs, giving your money time to grow.