How to Plan for Retirement just by Investing in ELSS
Retirement is a stage of life that most people look forward to and is inevitable. After working for 35 – 40 years, you want and deserve to sit back, relax, and pursue interests that you could not focus on earlier.
More importantly, you wish to maintain your current standard of living, while you are no longer employed. This is where retirement planning comes in the picture. Retirement planning means having enough money after you stop working to meet your expenses and maintain your present lifestyle.
When it comes to retirement planning, like most people, you may also choose traditional investment products like Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving fixed deposits (FDs), and National Savings Certificate (NSC), among other investment options. You will notice that all of these are tax saving and fixed income products.
Tax saving is an important factor of retirement planning as the more tax one saves, the more money they are able to retain after retirement. However, in the obsession with tax saving, you may end up overlooking the most important principle of investment i.e. investments must beat the rate of inflation!
The trouble with fixed income securities is that although these provide assured returns, the returns are usually lower than the rate of inflation. In such a situation, you are left with two choices—accept lower returns or contribute more money towards retirement planning. The latter, however, is often not possible as you may have many financial responsibilities like housing loan installments, vehicle loan repayment, and children’s education.
Considering the aforementioned, there is another tax-saving mutual fund known as the Equity-Linked Savings Scheme (ELSS). It provides not only tax savings under section 80C of the Income Tax Act but also delivers inflation-beating returns.
Equity-Linked Savings Scheme
ELSS is one of the best tax-saving investment options available today. It is a tax-saving mutual fund scheme, in which a majority (80% or more) of the fund corpus is invested in equity or related products. Therefore, you may earn higher returns while mitigating your risk through direct equity exposure.
- ELSS funds come with a lock-in period of three years, which means that funds invested cannot be withdrawn during that period
- These are managed by experienced fund managers and have historically outperformed traditional investment products like PPF, EPF, and insurance
- A major advantage of investing in ELSS is that it enjoys the exempt-exempt-exempt (EEE) status making it the best tax-saving investment. This means that investors do not need to pay taxes on the principal, dividends, and the maturity amount earned from investment in ELSS.
- Investments in ELSS are exempt under section 80C of the Income Tax Act to the extent of INR 1.5 lakh
- The minimum amount that may be invested is INR 500 but there is no ceiling on the maximum amount
- These funds offer no fixed returns because these depend on the market performance
ELSS for retirement planning
Making ELSS as the primary retirement planning investment has some attractive advantages. These meet all the criteria that you look for in an investment for retirement planning. ELSS is the best tax-saving mutual fund available in the market today as it has the potential to earn higher returns than traditional investments.
- Multiple options
These funds provide two options to investors—growth and dividend. Growth funds focus on capital appreciation while dividend funds are geared towards investing in companies that have a good dividend history.
You may put in a lump sum amount or invest through a Systematic Investment Plan (SIP). Creating an SIP also gives the benefit of rupee cost averaging. Even at the time of maturity, you may opt for a Systematic Withdrawal Plan (SWP) if you do not wish to withdraw the entire maturity amount at once.
- Lower lock-in period
Compared to other retirement planning investments, ELSS funds have the lowest lock-in period of three years. PPF has a lock-in period of 15 years, tax-saving FDs have five-year lock-in period, and National Pension System (NPS) comes with lock-in until retirement age.
- Higher return potential
The best ELSS funds have delivered exceptional returns in the past. This is because the corpus is invested in some of the best equities that have the potential to deliver higher returns.
Using ELSS to build a healthy retirement corpus has several benefits. However, it is likely that you may not have the expertise to choose the best ELSS funds. Angel Wealth helps you find these with the help of the ARQ investment engine, an integral feature of the Angel Wealth mobile application. Its focus on technology-based investment suggestions through ARQ enables the service provider to offer computerized recommendations that are free of human bias.
For more insights and on-the-go information, download the Angel Wealth app today.