If you have the money, it is advised to invest the entire Section 80C tax deduction benefit of `1.5 lakh in tax-saving investments at the start of the financial year
Equity-linked savings schemes (ELSS) have grabbed the attention of many investors. However, there’s a misconception that the ideal way to invest in ELSS is only through SIP (systematic investment plans). Let us understand whether you should invest a lumpsum amount in ELSS mutual funds or not.
What is ELSS?
It is a type of mutual fund that invests the majority of its assets in equities and equity-related securities. It allows an individual or an HUF tax deduction of up to Rs 1.5 lakh per annum under Section 80C of the Income-Tax Act, 1961. The funds have a lock-in period of three years, which also happens to be the lowest lock-in period among other Section 80C investments.
These tax saver mutual funds serve the dual purpose of capital appreciation (as majority of the assets are invested in equities) and tax-saving purposes.
When you dedicate a lump sum amount in ELSS tax-saving mutual funds, you buy units which are worth the investment amount at the then prevailing NAV of mutual funds or net asset value of the fund. Investing a lumpsum amount in mutual funds is preferred when the markets have low price volatilities. This is because the prices of the funds are somewhat steady in these markets and the cost averaging becomes irrelevant in such situations. As the entire amount is invested in one go at any point of time, the returns are significantly higher, and the power of compounding is able to multiply returns at an exponential rate.
If you have the lumpsum investment amount at your disposal, it is advised to invest the entire Section 80C tax deduction benefit of Rs 1.5 lakh in tax-saving investments at the start of the financial year. This allows for higher returns on your investments as your money is invested for a longer duration. What’s more, you do not have to make a hurried investment decision at the end of the year.
For business owners who have seasonal sources of income, lumpsum mode of investment would be an ideal investment way. If not that, then they might consider investing in both SIP and lumpsum investments basis their income cash flows. Doing so will ensure that they are not stressed financially during investing.
Source: Tax Guru