What is Systematic Transfer Plan ? How Does it Work ?

Systematic Transfer Plan is a Strategy where an investor transfers a fixed amount of money from one category of fund to another,usually from a Debt fund to an Equity Fund.

Investing a Lump sum amount in stocks of equity mutual fund could be dicey for some investor considering the volatility of equity markets and returns in equity mutual fund is linked to the performance of stock markets. STP helps to keep a balance of risk and return. Further, it helps investor invest in equity at appropriate time and till then, investor enjoy debt returns.

Benefits of Systematic Transfer Plan (STP) 

Consistent Return : Money invested lumpsum in debt fund earned interest till the time it is transferred to equity fund. The returns in the debt fund are usually higher than returns from savings bank account and assure relative performance.

Averaging of Cost : STP has some integral features of systematic investment plan (SIP). One of the difference between STP and SIP is source of investment. In case of STP money is transferred usually from a debt fund and in case of SIP, it is the investor's bank account. Since it is similar to SIP, STP also helps in rupee averaging cost.

Re-balancing portfolio : An investor's portfolio should be balanced between equity and debt. STP helps in re-balancing the portfolio by reallocating investment from debt to equity or vice versa

How does STP Work ?

Imagine you won a lottery of Rs 5 Lakhs and you want to invest in equity market but at the back of the mind you are not willing to take risk to entirely bet your 5 lakh on equity.

So here you will invest Rs 5 Lakhs via STP. You will have to select a source scheme (debt scheme) and a target scheme (equity scheme) , a fixed transfer date and a fixed amount.
In below example date is 25th of every month & 5000 would be transferred from ICICI Prudential Liquid Growth (DEBT) and transferred to ICICI PRU Value Discovery Fund - Growth (Equity)
Every month Rs 5000 would be transferred from Debt Scheme to Equity Growth Scheme 

STP - Transferor Scheme : ICICI Prudential Liquid Plan - Growth
Period	STP Start Date	Total No. Units Accumulated	Total Amount Transferred	Scheme Market Value(Rs.)
01-Jan-2013 to 08-Jun-2016	01-Jan-13	1,900.87	205,000.00	431,964.74
NAV Date	NAV	Units	Cash Flow	Amount	STCG/LTGC
01-Jan-13	169.91	2,942.77	-500,000.00	500,000.00
27-Jan-13	170.93	2,913.52	5,000.00	495,000.00	STCG
25-Feb-13	172.06	2,884.46	5,000.00	490,000.00	STCG
25-Mar-13	173.19	2,855.59	5,000.00	485,000.00	STCG
25-Apr-13	174.57	2,826.95	5,000.00	480,000.00	STCG
26-May-13	175.83	2,798.51	5,000.00	475,000.00	STCG
25-Jun-13	177	2,770.26	5,000.00	470,000.00	STCG
25-Jul-13	177.78	2,742.14	5,000.00	465,000.00	STCG
25-Aug-13	179.38	2,714.26	5,000.00	460,000.00	STCG
25-Sep-13	181.02	2,686.64	5,000.00	455,000.00	STCG
25-Oct-13	182.53	2,659.25	5,000.00	450,000.00	STCG
25-Nov-13	183.99	2,632.08	5,000.00	445,000.00	STCG
25-Dec-13	185.36	2,605.10	5,000.00	440,000.00	STCG
26-Jan-14	186.81	2,578.34	5,000.00	435,000.00	STCG
25-Feb-14	188.12	2,551.76	5,000.00	430,000.00	STCG
25-Mar-14	189.44	2,525.36	5,000.00	425,000.00	STCG
25-Apr-14	191.01	2,499.19	5,000.00	420,000.00	STCG
25-May-14	192.41	2,473.20	5,000.00	415,000.00	STCG
25-Jun-14	193.82	2,447.41	5,000.00	410,000.00	STCG
25-Jul-14	195.19	2,421.79	5,000.00	405,000.00	STCG
25-Aug-14	196.59	2,396.36	5,000.00	400,000.00	STCG
25-Sep-14	198.03	2,371.11	5,000.00	395,000.00	STCG
26-Oct-14	199.49	2,346.04	5,000.00	390,000.00	STCG
25-Nov-14	200.89	2,321.15	5,000.00	385,000.00	STCG
25-Dec-14	202.28	2,296.44	5,000.00	380,000.00	STCG
26-Jan-15	203.78	2,271.90	5,000.00	375,000.00	STCG
25-Feb-15	205.17	2,247.53	5,000.00	370,000.00	STCG
25-Mar-15	206.51	2,223.32	5,000.00	365,000.00	STCG
26-Apr-15	208.14	2,199.30	5,000.00	360,000.00	STCG
25-May-15	209.52	2,175.43	5,000.00	355,000.00	STCG
25-Jun-15	210.97	2,151.73	5,000.00	350,000.00	STCG
26-Jul-15	212.39	2,128.19	5,000.00	345,000.00	STCG
25-Aug-15	213.75	2,104.80	5,000.00	340,000.00	STCG
27-Sep-15	215.2	2,081.56	5,000.00	335,000.00	STCG
25-Oct-15	216.48	2,058.47	5,000.00	330,000.00	STCG
25-Nov-15	217.84	2,035.52	5,000.00	325,000.00	STCG
27-Dec-15	219.26	2,012.71	5,000.00	320,000.00	STCG
25-Jan-16	220.56	1,990.04	5,000.00	315,000.00	LTCG
25-Feb-16	221.97	1,967.52	5,000.00	310,000.00	LTCG
27-Mar-16	223.5	1,945.14	5,000.00	305,000.00	LTCG
25-Apr-16	225.12	1,922.93	5,000.00	300,000.00	LTCG
25-May-16	226.58	1,900.87	5,000.00	295,000.00	LTCG
08-Jun-16	227.25	1,900.87	431,964.74	295,000.00

From the above table we can identify that, With a lump sum investment of Rs 5 Lakhs in debt fund , even after transfer of 295000 (41 Months x 5000) , your value in debt fund is Rs 431964.74 which is approximate 8.88% return

In case if you withdraw money from liquid funds before 36 months from date of investments then short term capital gain (STCG) is levied else long term capital gain tax is levied (LTCG) and because of this reason it is been mentioned STCG & LTCG in the above example 

Let us see the value of equity growth fund now for which we transferred 5000 every month from debt fund.

STP - Transferee Scheme : ICICI Prudential Value Discovery Fund - Growth
Period	STP Start Date	Total No. Units Accumulated	Total Amount Invested	Scheme Market Value(Rs.)
01-Jan-2013 to 08-Jun-2016	01-Jan-13	2,593.17	205,000.00	301,896.92
NAV Date	NAV	Units	Cash Flow	Amount
25-Jan-13	58.12	86.03	-5,000.00	5,000.00
25-Feb-13	55.31	176.43	-5,000.00	10,000.00
25-Mar-13	52.85	271.04	-5,000.00	15,000.00
25-Apr-13	54.94	362.04	-5,000.00	20,000.00
24-May-13	54.17	454.35	-5,000.00	25,000.00
25-Jun-13	49.97	554.41	-5,000.00	30,000.00
25-Jul-13	50.76	652.91	-5,000.00	35,000.00
23-Aug-13	49.28	754.37	-5,000.00	40,000.00
25-Sep-13	52.99	848.73	-5,000.00	45,000.00
25-Oct-13	55.85	938.25	-5,000.00	50,000.00
25-Nov-13	58.23	1,024.12	-5,000.00	55,000.00
24-Dec-13	61.59	1,105.30	-5,000.00	60,000.00
24-Jan-14	60.26	1,188.28	-5,000.00	65,000.00
25-Feb-14	61.93	1,269.01	-5,000.00	70,000.00
25-Mar-14	66.22	1,344.52	-5,000.00	75,000.00
25-Apr-14	71.66	1,414.29	-5,000.00	80,000.00
23-May-14	84.58	1,473.41	-5,000.00	85,000.00
25-Jun-14	89.11	1,529.52	-5,000.00	90,000.00
25-Jul-14	91.93	1,583.91	-5,000.00	95,000.00
25-Aug-14	96.65	1,635.64	-5,000.00	100,000.00
25-Sep-14	97.86	1,686.73	-5,000.00	105,000.00
22-Oct-14	99.93	1,736.77	-5,000.00	110,000.00
25-Nov-14	105.39	1,784.21	-5,000.00	115,000.00
24-Dec-14	105.06	1,831.80	-5,000.00	120,000.00
23-Jan-15	113.62	1,875.81	-5,000.00	125,000.00
25-Feb-15	114.72	1,919.39	-5,000.00	130,000.00
25-Mar-15	114.3	1,963.14	-5,000.00	135,000.00
24-Apr-15	111.28	2,008.07	-5,000.00	140,000.00
25-May-15	114.89	2,051.59	-5,000.00	145,000.00
25-Jun-15	114.75	2,095.16	-5,000.00	150,000.00
24-Jul-15	117.07	2,137.87	-5,000.00	155,000.00
25-Aug-15	111.71	2,182.63	-5,000.00	160,000.00
24-Sep-15	111.36	2,227.53	-5,000.00	165,000.00
23-Oct-15	115.17	2,270.94	-5,000.00	170,000.00
24-Nov-15	114.08	2,314.77	-5,000.00	175,000.00
24-Dec-15	113.03	2,359.01	-5,000.00	180,000.00
25-Jan-16	105.52	2,406.39	-5,000.00	185,000.00
25-Feb-16	97.5	2,457.68	-5,000.00	190,000.00
23-Mar-16	108.33	2,503.83	-5,000.00	195,000.00
25-Apr-16	112.86	2,548.13	-5,000.00	200,000.00
25-May-16	111.02	2,593.17	-5,000.00	205,000.00
08-Jun-16	116.42	2,593.17	301,896.92	205,000.00

In Equity Fund your amount invested for Rs 205000 is now Rs 301896.92 which is approximate 23.87 returns 

Your Investment value on 5 lakhs is as on debt fund value + equity fund value i.e 431964 + 301896 = 733,860 in 41 months

Can you see the benefits of systematic transfer plan which offers consistent return , re balancing your portfolio and rupee averaging cost.

Be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via SIP in best 3 equity mutual funds in India for Retirement

PPS: If you think this page and blog will be useful to any of your friends please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left

Mutual Funds & Insurance Related Articles :-

Benefits of Systematic Investment Plan
What is Systematic Transfer Plan and How it works ? 
Advantages of Equity Linked Savings Schemes
Top 3 Mutual Funds to Invest in 2016 for Long Term
How Much Insurance Do I Need ?
How to Select Mutual Fund for Portfolio ?
How to Budget your money with 40/30/30 Rule ?
Mutual Fund Versus ULIP 
Why Term Insurance Policy is required till 60 years ?

Equities related article :

Market Order vs Limit Order vs Stop loss Order vs Bracket Order

Risk Management in Broking House for You as Investor
Understand Your Daily Margin Statement
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Futures & Options related article :

Futures Trading Terminologies
What is Futures Trading?
What is Derivatives ?
What are Forward Contracts ?
Advantages & Disadvantages of Futures Trading ?
Guide to Options Trading
Long Call - Bullish Trading Strategies
Long Put
Short Call - Bearish Strategies
Sell Put - Bullish Strategies
Buy Straddle Option
Short Straddle Option
Synthetic Long Call
Synthetic Long Put
Synthetic Long Futures
Synthetic Long Futures

Synthetic Short Call

Bull Call Spread

Bull Put Spread

In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me  @vipuls1979

Disclaimer  :-

The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

How to Budget Your Money with 40/30/30 Rule

Whether you are a parent with two kids or recent college graduate working your first job, 40/30/30 guideline can help you assess your budget. This approach often helps to understand the big picture of where the money is going.

Let us break your budget in three buckets (rather than the seemingly infinite categories of some traditional budgeting). It is designed to help you figure out how much you may want to allocate to each area every month, and can also help you determine the order in which your money can be allocated.

40/30/30 broken down

Fixed Costs

These are bills and expenses that dont vary much o monthly basis, like rent or loan payments, utilities and car payments. Also include subscriptions such as gym membership and DTH/Mobile/Internet accounts, in fixed cost because you are committed to payting them on a monthly basis.

When it comes to fixed cost, I would suggest that you aim to keep your monthly total not more than 40% of your take home pay.

Financial Goals

I would recommend keeping aside at least 30% of your take home pay towards important payments or contribution that will help you secure your financial foundation. I believe there are three essential goals everyone should strive for: savings for your goals, savings for retirement and building an emergency fund. But your financial goals can also include larger savings priorities, like a down payment on a new home or child’s education funding and lifestyle goal such as a vacation or a dream car.

Flexible Spending

Finally, consider budgeting not more than 30% of your take home pay towards flexible spending. There are day to day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies or entertainment.

I have included groceries in flexible spending because even though food is a necessity in your budget, how you spend on food can vary. Some days you would prefer to dine out and some days you prefer to make it yourself. It doesn’t really matter what you spend your money on each month in this category, as long as you are aware of your spending and not going over total flexible budget each month

One Note on Taxation

As you might have noticed the 40/30/30 guidelines applies only to take home pay. The deductions that are happening before the salary hitting your bank account is not considered. The deductions may be towards Provident Fund, Income Tax etc. While choosing to invest in retirement plans, equity linked tax savings mutual fund schemes you would save larger amount of taxes depending on Income Tax slab you belong to.

If you are just starting to put together a budget, the 40/30/30 guideline can serve as a useful benchmark for how to divide up your income.  When it comes down to it. Though, how you spend (and save) your money depends on your specific goals and lifestyle.

So be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via sip in best 3 equity mutual funds in India for Retirement

PPS: If you think this page and blog will be useful to any of your friends please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left

Mutual Funds & Insurance Related Articles :-

Benefits of Systematic Investment Plan
What is Systematic Transfer Plan and How it works ? 
Advantages of Equity Linked Savings Schemes
Top 3 Mutual Funds to Invest in 2016 for Long Term
How Much Insurance Do I Need ?
How to Select Mutual Fund for Portfolio ?
How to Budget your money with 40/30/30 Rule ?
Mutual Fund Versus ULIP 
Why Term Insurance Policy is required till 60 years ?

Equities Related Articles:

Market Order vs Limit Order vs Stop loss Order vs Bracket Order

Risk Management in Broking House for You as Investor

Understand Your Daily Margin Statement

What is Power of Attorney in Online Trading?

Futures & Options related article :

Futures Trading Terminologies

What is Futures Trading?

What is Derivatives ?

What are Forward Contracts ?

Advantages & Disadvantages of Futures Trading ?

Guide to Options Trading

Long Call - Bullish Trading Strategies

Long Put

Short Call - Bearish Strategies

Sell Put - Bullish Strategies

Buy Straddle Option

Short Straddle Option

Synthetic Long Call

Synthetic Long Put

Synthetic Long Futures

Synthetic Long Futures

Synthetic Short Call

Bull Call Spread

Bull Put Spread

In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me  @vipuls1979

Disclaimer  :-

The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

Why Term Insurance Policy is required till 60 years

There are so many term insurance plans in India right now which offers insurance for age up to 75 - 80 years, but the question is "Is it not good to have a look at why should you buy term insurance up to 60 years or retirement year which ever is earlier" 

If you are buying a Term Insurance Policy you should read this article and I promise you it is going to be worth reading.

Imagine you are a 35 years old and want to buy a term insurance but before that you should check how much insurance do i need, I have seen many companies providing life coverage up-till 75 years of age which may look good but in reality it is not because the real fact is you end up paying more than the sum insured.

I would not recommend term insurance policy for a period that covers you beyond age 60 (65 in some cases) under any condition. I have mentioned the points below

Income Contribution

Insurance is a risk mitigation tool for your income whether generated through salary or business. If I had to ask you how many years you are going to work, your answer would be around 60 or 65 which is the normal retirement age. This indicates that your term insurance should be up-till the time you are going to retire. In such a case, you should have term insurance up till your age 60

Must Read : Why Real Estate is and always was a Dull Investment

Death beyond 60 Years

Another question comes up here is what if you live longer than 60 years?

Since you started earning from your first job or business whatever the case may be, you have to accumulate wealth by the time of 60 which would in turn should meet the expenses towards your post retirement. After 60 years you would be having income from wealth generated so where is the question of protecting yourself from death beyond 60 years

Term Insurance policy when bought to insure your liabilities (home and auto loans, etc.)

Out of liabilities (loans) like home loan, car and personal loans etc. home loans has the longest tenure may be 20 years or 30 years depending on what you select. Banks mostly now a day includes home loan insurance as they have tie-ups with insurance companies and in event of death the proceeds of the home loan insurance policy payoff the balance amount to the housing or finance company who provided you the loan. Most banks provides you a loan which is capped by your retirement age, this is because once you retire there is no income hence no question of EMI Liabilities. It simply means your liabilities end as soon as you reach your retirement age

A policy like term insurance is not at all worth when chosen for a longer period:

Let me explain you with calculations below

For our Example I have taken a case where you are male, 35 years of age , nonsmoker and life cover of Rs 1 Crore.

For a term insurance of 25 year I mean cover till age 60 premium is Rs 12878/-

Life Insurance cover of Rs 1 Crore is constant throughout the policy period. So whether you die at 45 or 55 or 65, you get the same – Rs. 1 Crore. It is important to understand with time, the value of money reduces drastically.

 Premium paid at age 35 is Rs.12878.
(premium amount from www.policybazaar.com for ICICI Prudential Life Insurance) 
 By age 36, you have actually paid 12878 x 2 = 25,756. But since you paid premium more than a year ago, the actual value is 12878 x (1+12%) + 12878 = 27301. This is because of the opportunity cost, the cost of investing in a particular product and therefore forgoing the potential benefits of other product, in our case it would be investing in Mutual Funds with a return of 12% per annum.

Must Read : Top 3 Large Cap Fund to Invest in 2016 via SIP

By age 37, you have paid 12878 + 12878 x (1+12%) + 12878 x (1+12%) x (1+12%) = 43456, i.e. returns for 2 years on 1st premium, for 1 year or 2nd premium, … and so on. This is explained in the image below

Term Insurance for 60 Years

From the above image it is clearly visible that at the age of 60 your premium paid @12% is worth Rs 1717074
Still a good investment if you die (but who likes to die) and if you don't die,you know how much it is worth now,but why take risk ?

Good, Now let us take a look at below table where you have taken a risk cover of 75 years and premium paid is for 40 years with a premium amount of Rs 19,027

Term Insurance For 75 Years

With the same calculation, by the age 60 you would have paid a premium of Rs 2536944,do you really think it is worth?   
Well, at the age of 72 your investment in premium amount becomes worth Rs 10343052 for a life cover of Rs 1 Crore, If you die after 72 years your nominee will get Rs 1 Crore in-spite of paying more premium.

Longer the tenure, Lesser is the actual worth of your term insurance policy! As simple as that and after your earning years there seems no logical reason to have a term policy, it is just a bet on your death!!!

Must Read : Best 3 Midcap Churning Money For Investors

Note : The above may not work if 
a) your premium is too low 
b) Being a risk averse person you are not interested in equity and your rate of interest is around 8% or may be even low 
c) both a & b 
But the fact remains that after your retirement age it is just a bet on your death!!!

I would suggest you to take a term policy for 75 years because i have seen many people who have lost their fortunes due to bad phases in life,you can anytime stop the premium at the age of 60 if you have accumulated wealth and if something goes wrong then let it continue up to 75 years. 

So be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via SIP in best 3 equity mutual funds in India for Retirement

PPS: If you think this page and blog will be useful to any of your friends please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left

Mutual Funds & Insurance Related Articles :-

Benefits of Systematic Investment Plan
What is Systematic Transfer Plan and How it works ? 
Advantages of Equity Linked Savings Schemes
Top 3 Mutual Funds to Invest in 2016 for Long Term
How Much Insurance Do I Need ?
How to Select Mutual Fund for Portfolio ?
How to Budget your money with 40/30/30 Rule ?
Mutual Fund Versus ULIP 
Why Term Insurance Policy is required till 60 years ?


Equities related article :

Market Order vs Limit Order vs Stop loss Order vs Bracket Order

Risk Management in Broking House for You as Investor
Understand Your Daily Margin Statement
What is Power of Attorney in Online Trading?

Futures & Options related article :

Futures Trading Terminologies
What is Futures Trading?
What is Derivatives ?
What are Forward Contracts ?
Advantages & Disadvantages of Futures Trading ?
Guide to Options Trading
Long Call - Bullish Trading Strategies
Long Put
Short Call - Bearish Strategies
Sell Put - Bullish Strategies
Buy Straddle Option
Short Straddle Option
Synthetic Long Call
Synthetic Long Put
Synthetic Long Futures
Synthetic Long Futures

Synthetic Short Call

Bull Call Spread

Bull Put Spread

In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me  @vipuls1979

Disclaimer  :-
The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

Equity Linked Savings Schemes - ELSS- Tax Savings Instruments

What are Equity Linked Savings Schemes in Mutual Funds?

Equity-linked saving schemes are open ended equity mutual funds which are eligible for tax benefits under Section 80C. Below are some of the features that will help you make better investment decisions.

Taking a walk through the Equity linked savings:

Well, to simply define Equity linked savings scheme is a mutual fund scheme that invests more than 65% primarily in domestic equity markets. ELSS offers a tax deduction of up to 1.5 lakhs to the investors under the section 80C of the Income Tax Act, 1961. Like any other equity schemes, this investment scheme is suitable for the people who have got an appetite for medium to high risk and aim to generate capital appreciation over the medium to long-term. In simple words, ELSS helps in dual advantage of tax savings as well as growth of wealth but the only problem is it comes with a lock period of 3 years.  

Features of ELSS, making it worth:

When we talk about ELSS, there are many distinguishing features which actually make it a profit making investment.
The features are as follows:

• It is a diversified equity mutual fund which has a majority of the corpus invested in equities. 
• Automatic long term investment since lock- in period is 3 years from respective date of investment  
• Tax benefits under Section 80C which has got a potential saving of 46,350 at the time of investment if you fall in highest tax bracket 
• Dividends declared are tax-free. 
• No long-term capital gains tax on the withdrawal
• ELSS has got the potential for much higher returns compared to other tax saving instruments. 
• Available in both SIP and lump sum investment options.

Advantages of Equity Linked Savings Schemes
Looking at the trend of ELSS, the tax saving options in ELSS is simply turning out advantageous. This is true because it is one of the best taxes saving instrument one has got in its hand. The advantages of ELSS are as:

• As compared to the traditional tax, this is indeed one of the best methods of growing your money. 
• ELSS is an investment in equity markets and investing in this for a long-term can give you better returns compared to other asset classes over the long term. 
• It has got the shortest lock period.

·  ELSS are subject to market risk and volatility of Stock Market and because of this it has the highest earning potential 

    Disadvantages of Equity Linked Savings Schemes
    Where there are advantages, there are disadvantages too. So, you need to deal with all of them. ELSS too has got disadvantages and they are as follows:  

•     Money invested in ELSS are directly related to stock market, risk is involved.
•     Subsequent investment is also locked for 3 years. For Example you invested via SIP on 01/06/2016 & 01/07/2016 then on 01/06/2019 your units purchased on 01/06/2016 will be available for redemption 
•     And lastly, you should consider that you can’t reduce the impact of market fall, as you can’t switch or redeem investment before 3 years

    How can one invest in ELSS? 

The investment in the ELSS is just similar to any other mutual fund investment scheme. So, you can buy this mutual fund unit through the mutual fund distributor. In many cases, the stock broker also serves as a mutual fund distributor. The are independent mutual fund portals which provides online services for buying and selling of mutual funds schemes. You can save your investment with the help of the online and offline mode.

Compared to regular equity schemes, ELSS funds have a lower investment threshold of Rs 1000. You can also invest a large amount at one go, but the best way to invest in equity-oriented instruments is through SIPs.

For example, if you have Rs 30,000 to invest in ELSS funds this year, split them into three installments between now and 31 March. This will lower the risk by averaging out your cost of purchase. To start an SIP, submit post-dated cheques or give an ECS mandate to your bank.

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