Why should investing in ELSS funds become a habit?

A habit is formed when a behavior is performed repeatedly and consistently. Once it becomes a habit, it is easy to do it over and over again.

Habits help us in our life and many things we take for granted. When it comes to our finances, we have acquired some ingrained habits. For example, a regular income helps us pay for our regular expenses.

Yet, there is a possibility that we have developed a habit of spending easily instead of focusing on saving/investing. One reason for this is that the propensity to spend is easy, tangible and gives us instant gratification.

On the other hand, saving for a future goal does not provide any immediate gratification. Thus, most taxpayers start looking for tax-saving options towards the end of the financial year. By doing so, they miss out on thoroughly exploring all the options.

For salaried taxpayers, a significant component of tax savings is contributed through provident fund deduction which is essentially automatic by the employer every month or any other form of pension. Section 80C provides a wide range of options including Provident Fund (PF) contribution. The wide variety of financial instruments that qualify for tax savings can lead to biases in choosing one product over another.

Equity Linked Savings Scheme (ELSS) is one such product which has found acceptance among investors who opt to save tax under section 80C. ELSS offers dual benefits. You save on taxes and equity exposure provides an opportunity for wealth creation.

Equity as an asset class has given better returns than other asset classes in the long run. Nifty 500 TRI has witnessed a CAGR of 13.32% in the last ten years till March 15, 2023. (Source: Bloomberg) At the same time, ELSS has the lowest lock-in period of three years as compared to other tax saving instruments. Taxpayers who are comfortable with equity can consider this opportunity.

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

The advantage of spreading your tax savings throughout the year is that you do not have the last minute rush of investing in any product just to save tax which may not be suitable for you.

By planning your tax saving investments at the beginning of the financial year; You have the advantage of planning without worrying about money to meet your other financial needs. Similarly, an automatic process of tax saving every month will ensure that you develop a regular investment habit. Start a SIP and everything else will be fine.

As the money is invested through SIPs throughout the year, the cost averages out and ensures that you get better risk-adjusted returns over time. Through SIP, you can overcome behavioral bias while investing and timing the market.

Now that we are in the last phase of tax saving, you may want to invest lumpsum to bridge the shortfall under 80C. For the next financial year, it is wise to plan ahead to invest your money under Section 80C in ELSS. through SIP.

Investing in ELSS allows you to increase your investment as and when required, giving you the much-needed flexibility. Start with a regular amount that you need for tax savings and increase the contribution as you approach the financial year, if you notice any shortfall in your tax. 1.5 lakh limit under section 80C.

Develop a new habit of saving tax and building wealth with regular investments through SIP in ELSS. This will help you understand that over time, tax savings will be a by-product of wealth creation through ELSS.

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