Why investing in ELSS funds should be a habit?

A habit is formed when a behaviour is performed frequently and consistently. Once a habit is formed, it is effortless to perform it repeatedly. 

Habits help us through our lives and many things that we take for granted. When it comes to our finances, we have acquired certain inherent habits. For instance, a regular income helps us pay for our routine expenses.

Yet, chances are we have developed the habit to spend far easily than focus on saving/investing. One of the reasons is that the inclination to spend is easy, tangible and we get instant gratification. 

On the other hand, saving for a future goal does not provide any instant gratification. Thus, most taxpayers tend to start exploring tax-savings options at the fag end of the financial year. By doing this, they tend to miss out on exploring all options thoroughly. 

For salaried taxpayers, a significant component of tax savings is contributed through provident fund deductions that are automated by the employer each month or any other form of pension as mandated. The Section 80C offers a wide choice, including Provident Fund (PF) contributions. A wide variety of financial instruments that qualify for tax saving can leads to bias in choosing one product over other.

Equity Linked Savings Scheme (ELSS) is one product which has gained acceptance among investors choosing to save tax under Section 80C.  ELSS offers dual advantage. You save on taxes and the equity exposure provides an opportunity for wealth creation. 

Equity as an asset class, has generated better returns compared to other asset classes over the long run. The Nifty 500 TRI has clocked 13.32% CAGR in the last ten years as of March 15, 2023.  (Source: Bloomberg) At the same time, ELSS has the shortest lock-in period of three years compared to other tax saving instruments. Taxpayers who are comfortable with equities could consider this avenue. 

Just the way you get a regular salary, and your pension contribution is made every month; opt for a Systematic Investment Plan (SIP) when investing in ELSS. When it comes to saving for our goals, automating the process takes away the effort required to invest. Just the way you earn, spend, save, travel and socialise, make tax saving a regular habit. 

The advantage of spreading out your tax saving throughout the year is that you are not left with the last minute rush to invest in any product just to save tax which may not be suitable for you. 

By planning your tax savings investments at the beginning of the financial year; you have the advantage of planning your other financial needs without the worry of funds to meet them. Likewise, an automated process towards tax savings each month will ensure you develop the habit of regular investing. Initiate an SIP and the rest will fall in place. 

As the money is invested through the year via SIP, the cost gets averaged and ensures that you get superior risk-adjusted returns over a period of time. Through SIP, you can overcome behavioural biases you could encounter while investing and timing the market.  

Now that we are at the last stretch of the tax savings season, you might want to invest lumpsum to bridge the shortfall under 80 C. For the next financial year, it is wise to plan ahead to deploy your money under Section 80C into an ELSS through SIP. 

Investing in ELSS allows you to increase your investment as and when you need, providing you the much-needed flexibility. Start with a regular sum that you need towards tax savings and as you get closer to the financial year, increase the contribution if you foresee any shortfall in your ₹1.5 lakh limit under the Section 80C limit. 

Inculcate a new habit to save taxes and build wealth with regular investments through SIP in ELSS. This will help you realise that over time, tax savings would be a by-product of wealth creation through ELSS.

Author: Srinivas Rao Ravuri, CIO, PGIM India Mutual Fund