June 16, 2024

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How can SIP can be one of the best tax-saving instruments

If you are considering investing in the market, you firstly need to remember that investing requires a lot of patience on your part. One of the things that can help you to earn extra income in the market is to opt for the right investment tool available in the market. One of the numerous investment options available is a systematic investment plan. The simple terminology of a systematic investment plan or SIP is that it is a facility offered by mutual funds that allow an investor to invest a fixed amount of money at pre-defined intervals in the selected mutual fund scheme.

What is SIP?

A systematic investment plan (or SIP) is one of the numerous investment modes through which you can invest in mutual funds. As the name suggests, an SIP is a systematic method of investing fixed amounts of money. The investment made can be either monthly, quarterly or semi-annually.  When you invest steadily in this manner, it can become easier to meet your financial goals.

How do they work?

While investing through a SIP, you invest a fixed sum of money in a specific period. These investments help you purchase a certain number of fund units. By continuing to do this for a long time, you can invest in the fund during both, the highs and lows. In simple words, you don’t need to time the market to make your investments. Market timing can be a risky proposition as one can invest at the wrong time. Conversely, SIP investments remove this factor of unpredictability. After deciding on the investment tenure and frequency of investment, you can opt to automate your investments. Leave a standing instruction to your bank to transfer the amount directly from your bank account into the mutual fund SIP of your choice, on a fixed date. It is also important to note that you can use SIPs 

How SIPs help for ELSS:

ELSS funds provide investors with the opportunity to enjoy a reasonable income and save on tax. These funds are known for investing approximately 80% of the scheme’s assets in avenues like equities. However, it is important to make note of the fact that the revenue you could earn from them is directly linked to the market’s performance. They are a suitable option if you want to invest for long-term goals such as creating a retirement corpus or buying a new house. There are two investment options when it comes to ELSS. One is either lumpsum and the other is through a SIP.

Are there any benefits of ELSS SIP?

There are numerous advantages to investing in a systematic investment plan. Listed below are some of the benefits of SIPs linked to ELSS (equity-linked saving schemes):

  • ELSS SIPs are known for offering tax deductions:

Amongst the best advantages of ELSS is that it enables you to enjoy tax deductions under Section 80C of the Indian Income Tax Act, 1961. Numerous investors who seek tax-efficient schemes opt for equity-linked saving schemes. Therefore, if you as a part of a financial plan were to opt to invest in ELSS, you could end up enjoying a deduction of approximately ₹1,50,000 a year. This can be done under the provisions of Section 80C.

  • They are convenient:

Equity-linked saving schemes offer investors the convenience of investing through the SIP mode, through which you can invest fixed amounts every month or any other frequency of choice. Apart from helping investors stay disciplined, SIPs can also help them get higher returns through Rupee Cost Averaging. ELSS SIPs offer a lot of flexibility and unlike other investment plans, there are no penalties or policy suspensions for missed payments in ELSS SIPs. You can stop and restart your SIPs at any time. But, in case you miss 3 consecutive SIP instalments due to insufficient funds in your bank, your SIP will be cancelled, and you will have to make a fresh application to restart your SIP. Therefore, you should ensure that there is always a sufficient balance in your bank account on SIP dates.

  • They can help you to accumulate wealth over time:

Equity-linked saving schemes are equity diversified mutual fund schemes that come with a lock-in of three years from the date of investment. However, when the lock-in period ends, instead of withdrawing, you can opt for the funds to remain invested. You can do so to meet your goal which in this case would be to have enough balance in your account at the time of retirement.

While opting for ELSS funds, it is advisable for opting for investments through the SIP mode. That’s because this route will be light on the wallet. In case you are having doubts, please get in touch with financial advisors.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.