Retirement planning is something that one should invariably do when planning finances. And because you wouldn’t want to be dependent on your children and grandchildren for your expenses post retirement, you should take retirement planning pretty seriously.
Tax saving makes retirement planning tenfold easier. And that is why you should park your money in a retirement scheme that not just helps build corpus but also save taxes.
Looking from the point of view of a service holder, there is no financial planning more important than planning one’s taxes. According to the provisions of section 80 C of Income Tax Act, one can claim deductions on their income that’s taxable, by making investments in certain tax saving schemes and plans. One of the most popular of such investment plans is ELSS/ Equity Linked Savings Scheme.
ELSS is an equity oriented diversified plan that offers dual benefits of capital appreciation and tax savings to investors.
With more and more people turning to mutual funds for their capacity of providing higher returns, the popularity of ELSS is evidently on the rise. So, whether you are looking for one-time or periodical investment, ELSS could be a choice. It would, therefore, be valuable for you to understand the nitty-gritty involved in the scheme. So, without further ado, let’s take a deeper insight.
What are the most prominent features of ELSS?
ELSS is a scheme that has most of its corpus parked in equities. And because this is an equity oriented fund, the returns it offers is mostly from the equity market. The funds remain locked for a period of three years. So, no redemption is possible before the expiry of the said lock-in period. You also have the option to sell your ELSS post the expiry of the lock-in period of three years.
ELSS funds offer you the opportunity to choose between growth and dividend options-
Like most other equity funds, both growth and dividend options are available with ELSS. When you invest in the growth option, you get a lumpsum after the expiry of the lock-in period of three years. However, if you invest in the dividend scheme, you can earn dividend income on a regular basis. And you can get this income whenever the fund declares dividend, even if it is within the three years lock-in period.
Returns that you get from ELSS are tax free. According to sec 80 C of the Income Tax Act, up to one lakh of your ELSS investment can be claimed as a deduction from the gross total income you receive per year.
What are the benefits of choosing ELSS over other tax saving instruments?
Bank fixed deposits, National Savings Certificate (NSC), Public Provident Fund (PPF) are definitely some of the most talked about investment avenues popular among tax payers. But the lock-in periods of these schemes are long. While the lock-in period of PPF investments is 15 years, it is 6 years for NSC, and bank fixed deposits that are eligible for tax deduction, have a lock-in period of 5 years. On the other hand, ELSS has a lock-in period of only three years, which ensures better liquidity of your funds.
Investing in ELSS has another major benefit- returns! Yes, because ELSS is an equity linked investment avenue, the returns obtained from it are comparatively higher in the long run. And since, retirement planning is something you do on a long-term basis, you can build a sizeable corpus over time.
Also, if you are someone who is not disciplined in matters of investment, it would be valuable for you to know that equity linked savings schemes also offer you the option to invest in them through the Systematic Investment Plan (SIP) approach.
Because dividend option is also available under ELSS, you might earn from your invested money even during the lock-in period of the fund.
Now, you know how amazing an investment avenue ELSS are. They make your post-retirement life easy besides helping you save taxes. Although there are many retirement savings products are available in the market today, HDFC Retirement Savings Fund – Equity Plan – Regular Plan has been able to win hearts. Want to learn more about this scheme? Read on.
HDFC Retirement Savings Fund – Equity Plan – Regular Plan
The primary objective of this scheme is to be a source of regular income for investors. The funds remain parked in money market instruments and government securities that are maturating before or on the date of the plan. This scheme, launched on the 19th of February, 2016 requires investors to invest a minimum investment amount of INR 5000.
To understand how the scheme has performed over the years, let’s take a look at its performance table below. Here we can see, that the scheme offered a return of 28.68% in the first year of its launch, against 25.5% offered by other comparable funds in the market. We don’t have return figures for the third, fifth, and tenth years of the scheme’s advent, but we do have the since-launch return percentage of the scheme i.e. 35.98%, which is way higher than the market average of 17.35%.
Source: Swaraj Wealth Research
Since it’s a mutual fund, you have the option to invest in it through the SIP approach. Now, let’s see what happens when you invest in HDFC Retirement Savings Fund – Equity Plan – Regular Plan through systematic investment plan.
SIP Investment in HDFC Retirement Savings Fund – Equity Plan – Regular Plan
Source: Swaraj Wealth Research
If you started investing a monthly amount of INR 1000 in this fund on 06-12-2016, then by 06-11-2017, you would have got a profit of INR 17801. That means, your total investment over the year would have risen from INR 120000 to INR 137801. So, the profit percentage you would have earned is 34.09%, which is way too higher than the benchmark i.e. 32.23%. if you had invested in some other scheme, you would have got, on an average, a profit of INR 136875, which is lower than what HDFC would have offered.
Now, have a look at the growth curve of the scheme, below. The scheme offered a return of INR 137800 as on 6th of November, 2017, which is definitely impressive.
Source: Swaraj Wealth Research
So, the picture that this scheme draws is pleasant beyond question. And there is no reason why you shouldn’t invest in it for a secure post-retirement life.