SIP in ELSS Funds

SIP in ELSS Funds

A new year is usually associated with resolutions and a new financial year is a perfect time to make an investment resolution. The best one I can think of is a 'Year-round Tax Planning' resolution. Most of us typically do tax planning towards the fag end of the year when we are cornered and time is running out. We also want to invest the entire Rs. 1.5 lakhs which is eligible for exemption under section 80C of the Income-tax Act, 1961. This for some may be difficult to accumulate given the short time frame. An easier way out is to invest through an SIP in ELSS* every month starting April wherein you would need only Rs.12,500 per month. You may as well enroll for a perpetual SIP of Rs.12,500 p.m. and be assured of 'Year-round Tax Planning' year after year without worrying about deadlines anymore.

I am also happy that ELSS as a tax saving instrument is catching up as seen by the numbers released by AMFI^. The last 3 financial years have seen net inflows in ELSS increase from negative Rs.1642 cr in FY14 (net outflows) to Rs.2908 cr in FY15 (net inflows) and Rs.6413 cr in FY16 (net inflows). While net inflows have more than doubled in FY16, what needs a course correction is the last minute rush. As per AMFI, 88% of FY15 net inflows happened in the last 3 months (Jan-Mar) while this number was 55% for FY16. I hope to see more awareness building up on the importance of investing round the year vis-à-vis a point in time approach. The year round approach is not only economical on the wallet but also helps to average out the cost of units over longer time frames (called rupee cost averaging).

Our life goals too need a similar approach wherein we list out our broad goals and track our investments on a goal to goal basis so that there is no last minute scramble for funds. This way we also ensure that our near-term goals do not dip into the corpus of our far-term goals (like say retirement). If we take the example of the retirement goal, I have noticed that most investors start planning only when they touch 40 or 50 years of age. Why do so when you have close to 35 years plus to plan. If you start at age @ 25 years, a simple back of the envelope calculation reveals that you would need to invest only Rs.4619 per month in an SIP to build a corpus of Rs.3 crore for retirement (age @ 60 years) at an assumed rate of return of 12% p.a. However, a shorter time frame of say 20 years would increase the monthly contribution to Rs.30,026 and a 10 year time frame would further increase this to Rs.1.29 lakhs p.m. (all other assumptions being the same). To have a detailed financial plan for all your life goals, it would be preferable to engage a professional financial advisor.