An equity-linked saving scheme (ELSS) is a great investment option that offers the twin benefits of tax saving and capital gains. Earlier, investors had to spread their investments across different instruments such as PPF, ELSS, NSC and infrastructure bonds. But now, it’s possible to invest the entire limit of Rs 100,000 available under Sec 80C in ELSS. According to the new Income Tax Act, Sec 80C investments in ELSS are allowed as deduction from the total income, up to maximum Rs100,000 in a financial year.   

ELSS schemes have a three-year lock-in period, which works to the investors’ benefit as the fund manager can have a portfolio of stocks that can out-perform over a period of time.  

Why should one invest ELSS?

·          Lock-in for three years helps in staying invested over a long period

·          Investments in equity over a long-term delivers better returns

·          Tax savings and high returns

·          Through SIPs, one can invest small amount of Rs 500 in ELSS every month.

SIP – Systematic Investment Plan route for ELSS

One of the best ways to invest in ELSS is to save and invest on a regular basis. A Systematic Investment Plan (SIP) in ELSS gives the best combination of investments available to investors. The minimum investment in an ELSS through the SIP route can be as small as Rs 500.  

SIP helps an investor take advantage of the fluctuations in the stock markets by rupee cost averaging. Rupee cost averaging can be explained with the help of the following example. If Rs 1,000 is invested a month at a price of Rs 20 a unit, the investor will have bought 50 units (1,000/20). But at a price of Rs 10 per unit, he will have bought 100 units (1000/10). Investing a fixed sum regularly means averaging out the cost, as the investor gets fewer units when the price goes up, and more when the price goes down.

An SIP ensures that an investor buys more when the markets are falling and less when it's peaking. But if an investor backs out when the markets are falling, he won't be buying and this will not get him to average his price, the primary reason behind the success of investing through the SIP route.

When markets are falling, it's psychologically difficult for an investor to enter. On the other hand, when the market is at a peak, a lot of investors enter the market. Due to this, the investor ends up buying high and selling low. So, it's very important to continue with the SIP even when the markets are falling.

In the current volatile market, starting an SIP would be beneficial to an investor as he can take the benefit of highs as well as the lows and can average out his purchases. The returns of a few top performing ELSS through SIP, recommended by ICICIdirect is given in the table below.

     Source: ICICIdirect Research

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