Are you planning to do Investments? What have you decided? Do you exactly know what you would be investing in? Well, if you are not sure then why not just explore the option of ELSS? It is a good investment area and you can get amazing outcomes if you do it the right way.
Investments, In case you have not yet done your tax saving/planning for the year, you would be on a hunt for the right instrument to invest so as to save taxes. Equity Linked Savings Scheme (ELSS) is one such catering from the mutual fund realm. It is okay if you don’t know what is ELSS Investment? This post would get you a quick insight about this avenue,
Investments
Asset Class: in case you see the streak of instruments that cater benefit under the Sec 80 C, you are going to find that most of the offerings are in the zone of debt. PF, PPF, tax saving bank deposit, SCSS, NSC are all debt products. These offer fixed returns in fixed periods. Though of late small savings, schemes are associated with the debt market rate and therefore reset every year, it has relatively been in the same range for the last couple of years.
You know the tenures in such types of instruments are fixed and you get the maturity only amount on the date of maturity. Other instruments such as that of life insurance policies that cater tax benefits up to the amount of the premium paid are also relatively debt products, as well as being illiquid in nature. And it might interest you that tax benefits are also catered for tuition fee paid for two kids, on payment of the principal amount in a home loan.
A mutual fund is basically a collection of financial instrument in terms of shares and bonds managed by fund managers. They end up putting the sum of money in various types of financial instruments based on their risk appetite and duration of investing. Invariably tax-free mutual fund is a top draw among various investors. The diversification and flexibility it offers tilt the scale in its favour. A notable feature of a mutual fund is that you can invest with a small amount of money. No other form of funds allows you to invest with a meagre sum of money.
The benefits of investing in mutual funds in comparison to stocks
To invest your idle money is important. A compelling reason for you’re to invest is that you do not want to work for your whole life. There are a couple of ways by which you can make money, either by working or letting your money work for you.
Though no one would debate that investing in stock is a better option, as other options have their own pitfalls. For a lot of investors to invest in stocks via mutual fund works out to be a better option. Let us now explain the benefits of investing in mutual funds as compared to stocks in a direct manner
- To invest in stocks is going to take some amount of time in terms of research of which stocks to buy. Less time is taken to be aware of a mutual fund
- To invest in stocks market sentiment with proper research about a company is called for. A professional manager is expected to undertake proper research on the choice of the right stocks and keeps you updated about the prevailing market situation.
- To diversify your portfolio of stocks you might need a sufficient amount of stocks. On the other hand, mutual fund by virtue of diversification reduces the risk appetite to a considerable level.
- Investment in stocks is a lot riskier rather than when you invest in mutual funds. On having a higher risk appetite still, mutual funds are expected to provide a higher rate of return as compared to stocks
For all those who are of the opinion that they want to invest in stocks and feel that they do not have the levels of knowledge provided by various companies, investing directly in mutual fund market poses a risk. So it is beneficial to invest in the mutual fund.
Be aware of the basic types of mutual funds along with their subcategories
Mutual funds are divided into bond, cash and stock, though a further subdivision takes place. Once an investor is aware of how the classification of a mutual fund takes place it makes it considerably easier for asset allocation
The most popular form of mutual funds is equity funds. Most of the money obtained from an investor is incorporated into the stock market. The risk to invest in such type of funds is on the higher side and investors are considered to evaluate their risk appetite.
So fundamentally there is only one pure equity product informed as scheme offering tax benefit under Sec 80 C- ELSS. Once you go for this ELSS, you can enjoy:
Risk Tolerance
By nature, the area of equity is a riskier asset class and really prone to volatility. The same echoes in equity mutual funds. So ELSS is going to suit people who have the risk tolerance for highly volatile products.
Lock-in
Most of the instruments for tax savings are accompanied by long lock-in periods or long tenures. ELSS caters the shortest lock-in period in the realm of a tax saving scheme. This could be both a positive and a negative feature liable how an investor treats this scheme in his portfolio. In case it is treated as a portion of the equity component of the overall asset allocation, it is going to work wonders, but in case it treated a product which you can get out of in three years’ time, it can also backfire. Another notable point is that ELSS permits for investments through the SIP mode. It is essential for you as an investor to understand that every instalment gets locked-in for a duration of three years. Hence expecting that an investment made through SIP could be withdrawn at the end of three years shall not work.
Conclusion
Thus, since you know a bit about ELSS, it is time that you explore it and uses it to get the best outcomes.