Retirement Planning through Equity markets, really? Sounds pretty much like you won’t be thinking is possible, right? But what if I tell you that Retirement Planning through ELSS is very much possible and optimal option.
Let’s see why you should plan for your retirement first.
Why there is a need for Retirement Planning?
We enjoy and spend as much as we can afford when we are earning in our youth. But what happens when we retire and we don’t have an active income source which would be accruing and can be used for settling the commitments?
Retirement Planning helps us deal in a financial sense with the Post retirement expenditure and Lifestyle requirements as mentioned below :
- To maintain the current standard of living even after retirement
- To manage the increased burden of medical expenditure
- To allocate and mark up funds arrangement for vacation planning
- To maintain independent financial health and plan for succession
What is ELSS?
ELSS refers to Equity Linked Savings Scheme which means the mutual funds which invest primarily in Equity or stock market.
- ELSS allocate their 80% funds towards stock markets or equity instruments
ELSS are actually called Equity Linked since most or all of the money of the investors is invested in shares and securities.
- ELSS have tax benefit on investment
This means that investors can opt for tax deduction under section 80C for the amount invested in ELSS. If you redeem the ELSS after the expiry of lock-in period, then the proceeds will also be exempt from Income tax if the gain is less than 1 lac. Otherwise 10% of gain needs to be paid as taxes.
- Lock-in Period of 3 years
Since ELSS are tax-saving instruments, they come with a lock-in period. Once you invest in ELSS, you block your money for 3 years at least if you wish to save on tax.
- ELSS earn more than your regular deposits
Bank deposits are yielding lower interest rates right now and the Stock Market is beaming high. Even where all the ups and downs are considered, a decent wealth-building plan would definitely earn you more than Fixed deposits.
Related Article : FD vs. ELSS – Where does Mr. Gupta invest and why?
- Invest in SIP or in Lumpsum
You can opt for SIP route where you will investing in ELSS monthly or you can invest aa single amount in a lump sum.
- ELSS does not provide stable returns
Having said that ELSS earn more, it is because of the fact that these are based on the dynamic stock market. ELSS will not provide you fixed income however, you can decide to invest in ELSS based on various parameters which can give you leverage over this risk.
How can ELSS and Retirement Planning go hand in hand?
- ELSS allows you to track the value and much more at any time
Investors can easily track the value of their investment and the NAV of their investments at any point in time when they opt for ELSS. This allows them to check whether their funds have underperformed or are at optimal levels.
- ELSS helps you switch to other funds too
If you are unhappy about the performance of ELSS then you can use the switch option to divert your fund to the most eligible option, subject to conditions. This is possible in the same AMC and only after the lock in period is over.
- ELSS are professionally managed
Investors having an urge to invest in stock markets due to its lucrative returns, often back off due to lack of knowledge. However, ELSS helps you deal with this insecurity since those are managed by the qualified and experienced Fund Managers
- ELSS are transparent
All information related to inception, their composition, fund managers, returns, other parameters etc. is always available on public domain w.r.t ELSS. So there is nothing which is hidden about the ELSS.
What should you consider while doing Retirement Planning through ELSS?
- Expense Ratio
Expenses ratio refers to the expenditure with respect to the administrative structure which also includes a fund manager’s salary. ELSS with lower expenses ratio will always earn more just because the actual return earned by the fund is little eaten off by the costs of the ELSS fund management.
- Benchmarking of performance
This is a tricky one since the ELSS performance should always be compared with
- Its own historical performance
- And peer performance
These two criteria will always allow the investor to filter out the best ones.
- ELSS has dual advantages of tax saving and wealth building
ELSS are a very optimal investment option considering that it allows you to reap tax benefits as well as helps in wealth building. If you select an appropriate ELSS then you are sure to get inflation factored returns.
- AUM (Assets Under Management) and their composition
This data is always available on the public domain, so it is advisable that one should check these before investing in the same. Higher the size of AUM, greater are the chances of higher returns on the same.
Even with all these, ELSS is the most favourite tax saving instrument and can also be used as a tool for Retirement Planning. However, you will always need to check the corpus of retirement funds, desired ROI, Inflation rate impact and tax benefits. And once you are done with the evaluation, you should always jump in at the right moment to start earning early with ELSS.