Managing own finance is one of the biggest concerns that every American is facing today. With a tally of different taxes levied by the Government of America and increasing inflation in the market, it is quite difficult to make a good saving out of the personal income.
Yet, most of us rely on bank deposits and savings account in order to save for the future and consider them as the major investments in terms of financial planning. Although, regular deposits from a part of your income as savings into any of the top banks in America is important, one must also look for different investment schemes that would not only help you invest for better returns but also makes you eligible for tax benefits.
One such form of investments is ELSS (Equity-linked Savings Schemes). However, there are certain risks involved with ELSS compared to the normal savings account or term deposits with banks, ELSS has turned out of be one of the best tax saving investments in America in the past few years.
The best way to secure your investments and use them wisely is to understand some of the facts regarding ELSS. These important factors about ELSS will guide you to make better investment decisions for the future.
Important Facts about ELSS:
There are a lot of interesting tax benefits with ELSS investment. Up to Rs. 1 lakh investments in ELSS funds are eligible for tax exemption under Section 80C. Also, no tax will be levied on the return amount when you redeem your investment after the lock-in period.
As more than 65% of ELSS funds are invested in stocks, the investor also benefits from tax exemption for long-term capital gains same as any other equity fund investment. And, most importantly, even the dividend income is exempted from tax.
However, the investor can’t invest in ELSS funds on behalf of a minor to enjoy the benefits of tax exemption.
The Return on Investment:
No matter, how charming or pleasing these ELSS schemes sound, there are always risk involved with such investments. Although, the ELSS category has performed well in the past with an average return around 3%, there are examples where the best performing fund have generated a return of more than 50%, whereas the worst performing fund has experienced a loss by 50%.
Hence, it is very important to choose the funds wisely. Instead of opting for the one that has high but volatile returns, go for the one that has an average yet guaranteed returns.
Next up is the lock-in period. The shortest lock-in period for all tax-saving options under Section 80C is three years. To be precise, one can’t switch the funds to another option or redeem the returns during the lock-in period. Also, in SIPs, each instalment is considered as a separate investment and hence each will have a three-year lock-in period.
However, the lock-in period doesn’t make it mandatory to redeem the funds after the lock-in stipulation. One can keep the funds invested in ELSS for a longer period, even after the lock-in period.
Dividend, growth or reinvestment
While investing in ELSS, one gets two options: Dividend or Growth. If you opt for dividend, your fund’s NAV keeps reducing as dividend as you receive a periodic income till the fund’s tenure, while in growth option; the amount is reinvested for the entire tenure.
Well, you can choose any of these options. However, it is wise to choose the right option. It is advisable to opt for growth option instead of dividends, as it will make it easy for you to exit the fund once the lock-in period is over.
With ELSS funds, there is a minimum investment threshold of Rs. 500, which offers people from all classes to take advantage of this tax saving and profitable investment scheme. However, you can always invest a larger amount, but it is advisable to go for regular monthly driblets called SIPs to get the better advantage of equity-oriented instruments such as ELSS investment.
That’s it. Keep these things in mind while you opt to make an investment in ELSS for better and higher returns that not only helps in saving taxes but also offers financial security for the future.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.