Why invest in ELSS

Podcast Duration: 08:20

Hi friends, Angel One ke is podcast mein aapka swagat hai.

Doston the subject of taxes can keep both median earners and high earners up at night. Sometimes, tax can start looking like a no-win game. Aapne earnings generate karne mein round the year daily effort lagaya, lekin taxes eat up a big chunk of that money. Recently, main apne dost Sahil ke ghar par baitha tha. Sahil said ki last year, he effectively ended up paying over 3 lakhs in taxes - in other words, over 30% of his annual income.

This was alarming to me. Maine Sahil se poocha ki how come he ended up saving no taxes at all? Aur chai peete peete baat tax saving par chali gayi. When I recommended him to invest in public provident funds and bank FDs to save money, he didn’t like the idea of it. Basically, bank deposits ke returns bahut low the, and Sahil wasn’t incentivized enough by looking at those gains. Secondly, PPFs mein 6 se 15 saal ka lock in period hota hai - but he isn’t looking to save long term right now.

You know what I told Sahil then? Exactly what I am going to tell you right now.

And that thing is: there are 3 very solid reasons why investing in something called ELSS can help you First - save big, second - in a short span of time, and third - tax free.

Sounds exciting right? Teen major benefits packed in a single instrument… This must be the holy grail of investing isn't it? Toh dekhte hain what this ELSS hype is all about.

ELSS basically refers to Equity Linked Saving Schemes. These are basically schemes in which you can invest your money in the equity markets, while saving up to 1.5 lakhs in taxes. And now, we are going to discuss how ELSS hits four lucrative sweet spots in your financial portfolio - after which, you will not be able to refuse our advice to include ELSS in your portfolio.

Let’s start with number 1. ELSS basically aapke funds ko equity markets ka exposure dete hain. Now, you might contend by saying that there are mutual funds and stocks with which you can do the same. Lekin if you look at mutual funds, you will see a lot of options that limit you to certain sectors, markets, ya fir market caps. Saath hi, mutual funds don’t give you a tax benefit. ELSS packs exposure to all different types of industries and targets all market caps to give your short term savings the same boost of growth that drives the equity markets!

The bottom line is that while mutual funds help you grow your money, ELSS basically helps you grow your money and save taxes at the same time - and as you might be already aware, doing both at the same time is the key to building lasting wealth in the long run. Even if aapki income 15 lakhs se upar hai, and you fall into the 30% tax bracket, you can still save over 46 thousand rupees annually by investing in ELSS. Alright, enough said.

Now let’s move to number 2. ELSS ka lock in period kewal 3 saal hota hai. This makes it one of the only tax free investment instruments that will also fit your timelines for short term financial goals. If you look at FDs, toh inka return rate low hota hai and lock in period 5 years hota hai. PPFs and NSC are meant solely for long term investments too. ELSS gives you a powerful short term savings solution in this light.

You know, this is exactly why Sahil didn’t start investing in FDs. Sahil ko basically 3 saal ke baad ek car purchase karna thi. But FDs gave him little rewards in comparison to the effort he would have to put in order to set up an FD after a year full of savings.

From Sahil’s story, you can also infer the third cool benefit of investing in ELSS. You know, if you had to set up an FD, toh first of all, iske liye aapko kuch paise monthly apne savings account mein add karne padenge. If you also run your expenses with the same account, toh you might get confused over time, as to how much you have saved for your FD that you have to make at the end of the year. ELSS mein one time investment is not needed - kyunki they allow you to save systematically every month, at the same time towards your short term goal. Imagine, the scope of investing in ELSS - if you want to buy a laptop three years later, toh you can also invest in an ELSS, and Sahil, who wants to buy a car soon, can also invest in the same instrument. Short term savings, made tax free, and broken into small, easy to build parts - ELSS is beginning to sound very attractive already. And we haven’t even started discussing the fourth benefit yet.

Toh let’s see what else is in store.

ELSS also allows you to save money on the gains that you make over the period. For example, agar aapke Long term capital gains 1 lakh se kam hain, toh the gains on your savings will also be tax free. Sounds neat. But agar aapke gains 1 lakh se zyada hain, toh they will be taxed at 10%.

Now, is condition ko dekhkar you might feel that ELSS is perhaps not as ‘tax free’ as we claimed it to be. Lekin think about it once more. If you were earning enough to be able to invest so much money that brings gains of 1+ lakhs, then you are likely to fall in the 25-30% tax rate slab. Is situation mein, if you had opted for an FD ya fir mutual funds, toh aapko apne gains par apne tax slab ke rate par taxes pay karna padte - and that too, without the 1 lakh exemption on LTCG that you get in ELSS. This sums up some of the top benefits of ELSS - but we have only talked about the benefits that you get on paper. Before finishing, let’s see why ELSS makes sense for you personally.

Jab log invest karna shuru karte hain, toh they often set a strategy that’s too far sighted or too short sighted. In the earlier case, log apne saare investments ko high gains ke liye long term instruments mein invest kar dete hain. In the second case, people invest in highly risky instruments that have the potential to give big returns. Ye dono approaches unbalanced hain. And guess what? I have done this too.

Doston, in very simple words, your investment strategy should fit both your short term and your long term goals into your action plan. Iska matlab ye, ki you should probably be saving for your relocation requirements or car purchasing plans that are only a few years away, with an appropriate instrument.

Short term needs can also make loans look like a good alternative - but if you look at how short-term investments compare to fulfilling the same objectives with a loan, toh you will see a significant drawback in taking up debt.

ELSS can easily fit your annual and monthly investment action plan. Consider my friend Ramesh for example, who earns 10 lakhs annually - Ramesh ki in hand salary around 71 thousand hai - isme se Ramesh invests 8 thousand every month into mutual funds and 5 thousand in his PPF account. Additionally, Ramesh ne retirement ke liye bh savings start kar di hain - for this, he deposits some money into the National Pension Scheme. But Ramesh is planning to take a trip to Europe by 2025 - this is a dream that he wanted to fulfil since he started earning money. He estimated ki he will need at least 1.5 lakhs for this. When he heard about how I saved money for my new motorcycle with ELSS in the last four years, he was impressed!

That’s when Ramesh also added a 3 thousand rupees monthly contribution to an ELSS. Soon, he will be sitting in a flight to Germany without even realizing how he could neatly save for his trip without disturbing his long term investments.

By now, you probably see how ELSS can fit into everyone’s plan and how it can help you with both saving taxes and creating wealth - while also fitting your short-term goals.

Toh friends, this was the gist of today’s podcast. If you want to learn about more cool things that you can do with your money, then stay tuned to our channel - or visit www.angelone.in - where financial learning never stops!

See you in the next podcast - until then, goodbye from angel broking, and happy investing!