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THE start of the financial year is the right time to look carefully at various options for your tax-saving requirements. One of the routes that are suitable for this kind of investment is the equity-linked savings scheme (ELSS). This type of plan is suitable for those who want an exposure to equity and at the same time want to save some tax.
There are a few things that you will need to follow to ensure that the risk in the entire investment is moderated. While all these steps are no guarantee of success in terms of high returns, it does ensure that the processes are structured well. Here are a few details with respect to this area.
Limit of investments: The first thing that the investor has to decide is the amount that they would invest here out of the total tax deduction limit of Rs 1 lakh available under Section 80C.
The main point here is that since there is so much time left in the financial year to complete the requirement, the total investment can be spread over the entire year.
Many people put a lesser amount than Rs 1,00,000 here and there are a couple of points that will need attention.
The first point is that it is likely that there is some other tax-saving investments made elsewhere which will reduce the requirement for the total figure in ELSS. And if this is the case, then there is no need to lock-up a higher amount for a period of three years. The extra amount available from this action can be invested elsewhere.
The other thing is that if things are left a bit too late for investment during the year, then putting a high figure at one go might increase the risk and, hence, to keep this under control it is better to have it properly spread out.
Option chosen: Another way in which the risk can be reduced in such investments is by choosing the dividend option. When this is done then the individual will find that there is a route whereby the payout from the earnings in the investments is coming back to them and not being reinvested. So, some of their investments are being recovered since they cannot do much about the lock-in of the initial investment.
Since there is a three year lock-in on the investment, the problem is that if the dividend is not taken out and the growth option is taken, then the amount could compound, but this does not allow the investor to reduce the risk. This means that in the future if there is a time when the performance of the scheme takes a nosedive due to poor performance of the equity markets, then there would be a lesser amount that is at risk as some of the earnings have been taken out in the form of the dividends over the life of the investment.
Events impacting investment: One way in which the investor can also go about making the investment from the start of the financial year is by looking at the time period of the investment. If this is being made in one or two instalments, then this should not be in the middle of some big event that can lead to sharp movements in the market as this can have a disproportionate impact on overall investment position.
In such a position, the investor would be better off if they have chosen a time period when things are quiet and this should not be difficult to find when there is so much time left in the year. The lower the volatility, the better it is.
Though, over the life of the investment, this will not matter much, but this is just to ensure that there should not be a sharp fall in the days immediately after the purchase. If the investments are spread out evenly throughout the year, then this would cease to be a major source of worry.
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