Mutual fund schemes are helping investors to save for their long-term goals such as home buying, child education, marriage needs and even for their own retirement. Of the various MF schemes, equity linked savings schemes (ELSS) occupies a special position when it comes to saving for retirement.
ELSS is a mutual fund scheme that comes with tax benefits under section 80 C up to Rs 1.5 lakh and has the shortest lock-in period of three years. The amount invested in ELSS qualifies for deduction and thus reduces tax liability based on the investor’s tax slab.
ELSS is primarily an equity fund with at least 80 per cent of allocation into equities. It has been seen in the past that over the long term, equities tend to drift upwards and have delivered returns higher than other asset classes after adjusting for inflation. ELSS fits the bill but still invest in them if your risk profile allows. The volatility in the short-to-medium term is high in them.
One may invest a lumpsum in ELSS or even start an SIP so that the benefit of rupee-cost averaging is available to you. However, each SIP installment of SIP will have a lock-in period of 36 months.
You not only end up saving taxes but also let your investments grow towards a long term goal. Ideally, all your investments should be linked to a goal and ELSS investments may be directed towards your retirement.
If your retirement is 20, 25 or 30 years away, Rs 1 lakh invested in ELSS each year may create a corpus of approximately Rs 80 lakh, Rs 1.5 and Rs 2.7 crore respectively, assuming an annualized growth of 12 per cent.
Diversify across 2-3 ELSS and make sure you have exposure to schemes with varying market capitalization and diverse industries. After the lock-in period of 3 years ends in ELSS, you may continue to remain invested and let the funds grow. Also, let the SIPs continue to grow till your retirement. When you are 3-5 years away from retirement, start shifting ELSS funds value, which would have completed the lock-in period, towards debt funds to preserve the accumulated corpus. The money you invest through lumpsum or SIP will work as a means to fetch pension for your post retirement needs.