Mutual Funds

How ELSS is better than any other Tax saving scheme?

If you are looking for tax savings this season, then look no more. We have come up with an interesting blog on the evergreen topic of whether ELSS is better than any other tax-saving scheme. And what’s more interesting is that we have also summed up answers to every Why of yours. So what are you waiting for? Let’s skip this journey to the main content.

What options do you have for tax saving instruments?

Income Tax Act allows a deduction from the gross total income if the taxpayer invests in allowed tax saving instruments. There are multiple options in which the taxpayer can make the investments and save the tax impact. 

Section 80C of the Income Tax Act prescribes various modes through which the taxpayer can save the tax which is as follows:

ELSS 

ELSS refers to Equity Linked Saving Scheme which are mutual funds that invest 80% or more in equity. These are very attractive from viewpoint of returns but carry little more risk as compared to other saving alternatives.

PPF

PPF refers to Public Provident Fund which requires the taxpayer to open the PPF account in any of the authorized banks. Lock-in period is 15 years with partial withdrawal allowed once in a lifetime. 

Life Insurance Premium

Life Insurance Premium paid towards self and family are allowed as a deduction under section 80C of the Income Tax Act.

Fixed Deposits 

These are 5 years term deposits that can be maintained with any bank. However since the interest rates are falling, Bank Fixed Deposits are a little lesser attractive from the perspective of tax saving.

NSC 

NSC refers to National Saving Certificate as another tax-saving instrument that has a lock-in period of 5 years. It has a guaranteed return which changes periodically.

ULIPs

ULIP refers to Unit Linked Insurance Premium which can be said as a combination of mutual fund and insurance. This is more of an insurance product with investment component in it. 

Why ELSS is better than any other tax-saving instruments?

• Higher returns as compared to other conventional investment instruments
• ELSS has wide exposure to the stock market which makes it a very lucrative and attractive option for tax saving as well as wealth building. 

Even though there was some impact on the stock market due to pandemic, the stock market has bounced back up. This has resulted in a huge surge in absolute returns derived by the ELSS especially. 

In all, ELSS comes with higher returns even if not guaranteed, around 12-15%. In every sense, it beats the inflation rate.    

High liquidity due to the lowest lock-in period

ELSS has the lowest lock-in period of 3 years which can be termed as lowest as compared to other tax-saving investments which are a minimum of 5 years. 

Since ELSS has the lowest lock-in period, it is suited best to short-term to medium-term financial goals also. Hence, it allows the investor to manage the liquidity position in a short time span. 

Highly flexible mode of investment 

ELSS allows you to switch between the mutual funds pertaining to the same AMC (Asset Management Company) or any other AMC. Some of the ELSS also allow switch options within their AMC as a mandate action discretionary upon the investor. 

Single Demat account required 

ELSS investment needs to be made through a Demat account which can also be used for investing in shares and securities. So investors get to invest in various types of instruments in a single Demat account. This helps the investor to keep a single control over investments.

Why choose ELSS over other saving instruments?

Particulars	ELSS	PPF	ULIPs	Fixed Deposits
Type of Instrument	Linked to the stock market since almost 80% or more is invested in equity	Government-backed saving instrument	Combination of equity/Debt exposure and a portion of insurance where insurance is the core service area	5 years term deposit with any bank
Lock-In Period	3 years	15 years	5 years	5 years
Investment	Rs.150,000	Rs.150,000	Rs.150,000	Rs.150,000
Risk %	Moderate to high	Low since the returns are guaranteed by the government.	Moderate to high due to a combination of equity exposure and insurance portion.	Low since they carry a fixed rate of interest
Return	Highest return in the brackets of the tax-saving instruments around 10-13% or even more provided high-risk appetite is assumed	Fixed-rate of return is prescribed by the government which may or may not be changed periodically. However the current rate of return revolves around 7.10%-7.60%	Even if the ULIPs have absolute returns of 10-12%, most of the portion of returns is allocated towards mortality costs etc. hence it impacts the effective return in the long run.	Fixed Deposits have interest rates of 6.5% -7% currently. Due to falling interest rates, it is difficult to predict whether the bank FD rates will pick up 0r further go down which may seriously affect the effective return

Conclusion

This gives us the fair idea that investors should go for ELSS if they have a moderate to high-risk appetite and desire to earn lucrative returns. ELSS is a dynamic form of investment that can be used as a tax-saving instrument as well as a wealth-building tool. It is always up to the discretion of the investor whether to go for a decent rating and moderate returns, which is a good combination of risk-reward ratio. Nevertheless, it comes at a low cost and also can be invested in lumpsum or SIP which makes it easier to maintain liquidity. In all, a win-win situation for the investor.  

What is ELSS? Is ELSS Different from Mutual Funds?

Mutual funds have revolutionized the way people invest. Earlier, risk-averse individuals preferred fixed deposits while risk-taking investors went for stock markets. However, lately, mutual funds are becoming a favourite among investors. They promise market-related returns while the risk is diversified over a wide portfolio. What’s more, even small investors can invest in a mutual fund scheme if they want to reap the returns promised by capital markets.

Mutual funds come in various types and ELSS plans are also one type of mutual fund scheme. However, many investors confuse between the two. While some believe that ELSS schemes are not mutual funds, others feel that both ELSS and mutual fund schemes are one and the same. Are these beliefs correct?

No, they are not. ELSS schemes are, actually, a subset of mutual funds. They are a type of mutual fund which has distinct features and benefits. Let us study ELSS and mutual funds in conjunction with one another –

ELSS and Mutual Funds

You can invest in ELSS and in mutual funds either through lump sum or through SIPs (Systematic Investment Plans– i.e. periodic installments).

Both invest in the capital markets and yield good returns.

Nature of investment

ELSS stands for Equity Linked Saving Scheme. As such, about 65% to 70% of the scheme’s portfolio is invested in equity shares. That is why ELSS plans promise good returns and are also prone to risks. Mutual funds, on the other hand, come in different varieties. There are debt mutual funds that invest a majority of their portfolio in debt instruments and equity mutual funds that have higher equity exposure, balanced funds that have a combination of debt and equity in moderate proportions and so on. So, while ELSS is primarily an equity fund, Non- ELSS mutual funds can be equity, debt, balanced, hybrid or any other type.

Tenure

ELSS plans have a lock-in period of 3 years. This means that your investments are locked in the scheme for three years and you cannot withdraw them. ELSS schemes are, thus, not very liquid. Non-ELSS mutual funds have no such lock-in period. You can redeem your investments whenever you like without any restrictions.

Tax benefits

ELSS is popular because it is tax-saving in nature. The investments you make, up to Rs.1.5 lakhs are exempt from tax under section 80C. Moreover, the interest earned and the redemption proceeds are also tax-free upto 1 lac of gain because they are called long-term capital gains.

The taxation of Non-ELSS mutual funds depends on the portfolio. The gains from equity mutual funds becomes tax-free upto 1 lac after 12 months. So, if you redeem your investment after a year, it becomes a long-term capital gain and is exempted from tax upto 1 lac and taxed at 10% on balance gain amount. For debt mutual funds, however, the redemption proceeds are taxable. If redeemed before 3 years, debt mutual funds are taxed at your income tax slab rate as short-term capital gains. If, however, you redeem your debt mutual fund after 3 years it becomes long-term capital gains and you get the benefit of indexation. The tax rate is 20% with indexation benefit.

Here is a comparative table for a quick analysis –

Points of distinction	ELSS	Other Mutual Funds
Type	Equity oriented mutual funds	Can be equity, debt, hybrid, balanced, etc.
Tenure	Compulsory lock-in period of 3 years	No lock-in tenure. Can be redeemed when desired.
Taxation	Investments up to Rs.1.5 lakhs are exempted under Section 80C. ELSS are tax-free upto 1 lac after 12 months.	Investment is taxable. Equity mutual funds are tax-free upto 1 lac after 12 months. Debt mutual funds are taxed at income tax slab rate if redeemed before 3 years. If redeemed after 3 years they get indexation benefit and the tax rate is 20%.
Suitability	Investors who are looking to invest for tax saving purposes for long-term as ELSS have a lock-in of 3 years.	There are various Non-ELSS mutual fund options for all risk appetites and investment horizons.
Non-suitability	Investors towards retirement (low-risk appetite) or who have already exhausted their Sec 80c limit, can look at other tax saving options.	Investors with high to moderate risk appetite should invest in Non-ELSS plans.

So, the next time you go shopping for investments, remember that ELSS and other mutual funds are not the same. They differ from each other in various aspects, as explained above. So, be wise and choose your investment instrument after a thorough analysis of your investment goals, time horizon and tax benefits. Do consult an expert, should you require help with picking up the best plans as per your requirements.

ELSS vs Public Provident Fund (PPF): What return Mr. Iyer may get with ₹ 5000/month in 5 years.

“Bank Fixed Deposits are not going to work for me! I am planning for building up a fund for paying off my daughter’s college fees.” Mr. Iyer was telling me the other day. 

“I want to know where I can invest for 5 years so that I would be able to  pay off the college fees easily after 5 years?” Mr. Iyer was indeed worried because he is not able to understand how to work this out. 

Mr Iyer is a representative example of the common man to whom any of us can relate to. There are so many financial instruments in the market, then how to choose the correct one suited for our financial goal. Let’s see in this case study where Mr Iyer can invest fruitfully for 5 years in ELSS vs PPF Public Provident Fund

Let’s understand what are ELSS (Equity Linked Saving Scheme) and PPF (Public Provident   Fund)

ELSS refers to Mutual Funds that invest 80% or more in equity i.e. shares and securities. ELSS is one of the primary tax saving instruments which has a lock-in period of 3 years. Investors can invest in ELSS in a lump sum or through SIP (Systematic Investment Plan). SIP requires that the investor should invest a fixed monthly amount in a selected ELSS fund. 

Read more about ELSS Funds – 7 Reasons Why ELSS Has Evolved Into A Popular Tax Saving Alternative

PPF refers to another tax saving instrument which is a rather long term investment term of 15 years. The investors would be required to open a PPF account wherein he is required to invest monthly or annually. 

The differences between ELSS and PPF 

Parameters	ELSS	PPF
Lock-in period	An investor needs to stay put in ELSS for the minimum period of 3 years to get a tax deduction benefit on the investment under section 80C	Lock-in period for PPF is 15 years which is much higher as compared to ELSS. Even though partial withdrawal is allowed after 5 years, substantial money will still be blocked till maturity.
Liquidity	Due to 3 years lock-in period, the investor can easily redeem or sell to quench its liquidity needs	Due to greater lock-in period, PPF can be touted as an illiquid instrument, more suited to long term financial goals like retirement planning etc.
Returns and risk ratio	ELSS has a moderate to higher risk and returns ratio since 80% or more of the funds are allocated towards shares and securities in the open market. Returns could be on an average 10-13% p.a. The risk could be in the corresponding % due to market uncertainty	PPF has a lower risk-return ratio since it is a government scheme. Returns could be around 7-8% as dictated by government. Risk is very less since the returns are guaranteed by the government
Taxation	Investment in ELSS is covered under section 80C deduction, however, the capital gains are taxable above the limit of Rs.1 lakh	PPF has an EEE structure meaning that investment, returns, as well as maturity proceeds, are exempt from the income tax purview.

Let’s compare ELSS and PPF for Mr. Iyer

I showed all this data to Mr. Iyer who was again confused, “Anna, it looks like both ELSS and PPF have their pros and cons. How would I know which one is better for me?”

So here is the comparative chart where it is assumed that Mr. Iyer invests Rs. 5000/- per month in ELSS and PPF. 

Year	The amount received annually if Rs.5000 invested in ELSS	The amount received annually if Rs.5000 invested in PPF
1	Rs.63,266/-	Rs.62,308/-
2	Rs.1,34,203/-	Rs.1,29,039/-
3	Rs.2,13,742/-	Rs.2,00,508/-
4	Rs.3,09,926/-	Rs.2,77,052/-
5	Rs.4,02,924/-	Rs.3,59,030/-

*assuming that ELSS earns a rate of return around 11.5% and PPF earns around 7.1%

Analysis of the case study

• Looking at lucrative returns earned by the ELSS, ELSS definitely makes a good option for a 5-year investment option
• However, while considering the higher rate of return, we also must attach the risk carried by ELSS in the form of unguaranteed returns and loss of principal.
• PPF returns even if secure and easiest way for investing, definitely takes a toll on the liquidity stature of the investor. Since PPF allows only partial withdrawal after 5 years, there is no chance that Mr. Iyer could take out money before that threshold.
• PPF is the most secure form of investment since it is backed by the government. Even if the rate of return does not factor in the inflation cost, there is no default risk or market risk in PPF.
• If we keep on populating the returns for both ELSS and PPF for a longer period, ELSS would bag the surge in returns in the long term considering that markets will be in the progressive mode of operation. 

Conclusion

I suggested Mr. Iyer take an independent decision based on the below pointers. Hope it helps you all too to take a big leap.

• If Mr. Iyer wishes to conserve the capital and is wary of the stock market, then he can put his money in PPF. This would give him the guaranteed returns and security of principal invested. However, the con side to this would be 

1. Comparatively lower returns 
2. No inflation factoring of returns 
3. The long term Lock-in period of 15 years resulting in a liquidity crunch

• If Mr. Iyer has a moderate to high-risk appetite, then he can think of putting his money into ELSS funds to secure a higher rate of return. ELSS would be a very liquid asset as well as a high return bracket. However, there are few risks to think of

1. Loss of principal due to market risk
2. Unguaranteed returns 

• Alternatively, Mr Iyer can divide his investment in PPF and ELSS to reap higher returns and square off the losses. 

7 Reasons Why ELSS Has Evolved Into A Popular Tax Saving Alternative

Equity Linked Saving Scheme can serve as the ideal option for those investors who wish to benefit from tax savings and better returns in the long run. Coupled with a drastic growth in its popularity over the last few years, a large number of misinformation has developed surrounding its operations. Today we are going to educate all potential investors about the advantages associated with making ELSS investments in stark contrast to other tax-saving options such as PPF or NPS.

Return

One of the very first things we enquire about an investment vehicle is the rate of return it promises to shower us with on the passage of a considerable time frame. In comparison to other tax saving options providing between 5-8% return, ELSS funds that invest mostly in equity schemes provide between 10-15% returns. The benefit of compounding joins hands with returns from equity to provide investors with higher returns in the long run. Favorable scenarios arising in the stock market which is highly probable in a growing economy like India can help you in reaping greater returns with a carefully constructed portfolio. Investing discipline as we all know is the key to benefitting out of good returns and this is taken care of in the best way by the three-year lock-in period which paves the path for higher yields.

Related Article : FD vs. ELSS – Where does Mr. Gupta invest and why?

Lock-In Period

While Public Provident Fund (PPF) comes with a 15-year lock-in period & NPS cannot be redeemed before retirement. ELSS funds on the other hand can be redeemed after the passage of just 3 years which surely is the shortest amongst the financial instruments which qualify for 80C benefits.

Power Of Compounding

Investing discipline as we all know is the key to benefitting out of good returns and this is taken care of in the best way by the three-year lock-in period which paves the path for higher yields. However, for better returns, it is advisable to stick to your investment over a span of 5-10 years.

Safety

Mutual fund investment has become highly transparent off late with the inclusion of KYC procedures and investor protection guidelines. Since all mutual fund companies operate under the purview of SEBI and are thus under an obligation to make necessary disclosures, you can be completely guaranteed the safety of your ELSS investment.

Flexible

ELSS funds can be redeemed after the passage of 3 years from the date of investment if investors are not satisfied with the rate of return. Alternatively, they can carry on with the investment plan with no upper limit on the tenure.

Related Article: Retirement through Equity Linked Savings Scheme

SIP

Systematic Investment Plan serves as one of the best available ways of instilling investor disciple through regular investment and ELSS schemes can provide them with the option of benefitting out of the same over the long-term horizon. With monthly investments possible at just 500 INR, you can easily turn your savings into investments by riding on the ELSS vehicle. In this way, a salaried individual can invest a portion of his salary periodically for benefitting out of compounded returns.

Tax Efficiency

The amount invested in ELSS can be claimed u/s 80C as a tax deduction up to the maximum limit of 1.5 lakh INR. In spite of having a lock-in period of three years, ELSS returns are considered as long-term capital gains (LTCG). However, in stark contrast to short-term capital gains (STCG) which is subject to a 15% tax levy, LTCG is subjected to 10% taxation if the gain amount exceeds 1 lakh INR.

ELSS investment is completely paperless in nature thus allowing investors to engage in the same even by using websites or mobile applications. Even payments can be done through debit cards and net-banking after which investors can track, invest further or redeem their investments by sitting at the comfort of their home. ELSS mutual funds is the ideal choice for everyone who wish to save tax while maximizing returns.

Retirement through Equity Linked Savings Scheme

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

1. Its own historical performance 
2. 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. 

ULIP Vs Mutual Funds. Check out where Mr Mehta invested.

Everyone wants to be safe and make the optimum utilization of their funds. However, not every financial instrument is made up of everyone. Financial Advisors always look at the following angles before advising the investment alternative. 

• Short term Goal

Tax saving instrument, Interest earning, etc.

• Medium-term Goal

Wealth building instrument, Value Investing, Mutual Funds (dividend option), etc.

• Long Term Goal

Related Article: 5 Factors To Consider While Making Lump-Sum Mutual Fund Investment

Retirement Planning, Succession Planning, etc.

Each phase of human life needs a peculiar and appropriate investment instrument. Let’s understand how should you choose and opt for the appropriate option of ULIP or Mutual funds.

What are ULIP and Mutual Funds?

ULIP refers to Unit Linked Insurance Premium which is a unique insurance plan, which integrates benefits of both insurance and investment in a single instrument. 

In all, it can be said that ULIP is a Hybrid instrument and not a pure insurance policy. ULIP will allow the flexibility to go for wealth building while being under insurance cover.

Mutual Funds refer to the investment pool which is managed by a professional portfolio manager. Any mutual fund would be divided into a number of small units. These units are calculated based on the basis of Mutual Fund’s Net Asset Value.

Difference between ULIP and Mutual Funds 

ULIP	Mutual Funds
ULIPs include both the components of Investment Insurance	Mutual Funds are purely an Investment instrument.
ULIPs carry a Lock-In period of 5 years. ULIPs can not be fully or partially withdrawn during this Lock-in Period.	Mutual Funds are Liquid Financial Instrument since these can be redeemed or sold in the market at any time. (apart from ELSS which have Lock-in Period of 3 years)
ULIP do not display or present their structure of investment on public domains for the general public. This is because ULIPs have a very complex structure hence becomes a little less transparent as compared to Mutual Funds	Mutual Funds carry a simple investment structure which is determined at the inception of Mutual Fund only. Hence, Mutual Funds are much more transparent since the smallest detail about their investment structure are usually hosted on public domain.
ULIPS are good for tax management because Investment in ULIP is considered as a deduction from taxable income under section 80CMaturity amount is tax-free under section 10(10D)	Tax impact with respect to Mutual Funds can be summarised as below Investment in Mutual Funds is covered under section 80C  only if the same is ELSS (Equity Linked Savings Scheme)Maturity amount / Redemption amount / Amount on sale is taxed as capital gains
ULIPs come with several charges like Fund Management Charges, Mortality Charges etc. This will result in a reduction of pure investment corpus which would actually be deployed for return earning purpose.	Mutual funds on the other hands are not burdened with the Mortality charges and also expense ratios are competitive. This results in better-earning prospect even with the impact of exit and entry load
ULIP are subject to discontinuance charges when they are redeemed prematurely. This would impact the return.	Mutual funds are subject to only exit load even if withdrawn before the expiry of Lock-in Period. This would not impact the returns already earned during the period of investments.

Related Article: Postal Recurring Deposits Vs. Mutual fund SIPs

Case Study Analysis for ULIP Vs. Mutual Funds 

Let’s take an example of Mr Mehta who is in aged 30 years. He wants to invest in credible and safe investment instrument which will put his funds to optimum utilization. His annual income is Rs.20 lakhs and he is ready to invest Rs.2 lakhs maximum in a year 

Mr Mehta is contemplating 2 alternatives for investment; One is ULIP and another is Mutual Funds 

A financial advisor has suggested Mr Mehta to invest in ULIP for 20 years which would earn him a decent rate of return and an additional insurance cover. This ULIP is estimated to earn a rate of return around 10-12% since it is market-linked. 

In this case, if Mr Mehta thinks that he could allocate the whole of his excess towards the ULIPs. This would result in the following scenarios 

1. The insurance cover in ULIP is only proportional and usually on the lower side. This would only give him insufficient cover in the long run. Suppose Mr Mehta goes for Rs.50,000/- in a year, it would only give him Insurance cover of Rs. 5,00,000/- in the long run.
2. The returns fetched would be first allocated towards charges and the commission so the effective rate of return earned on ULIP would not reach the target rate of return.
3. If Mr Mehta wishes to switch or discontinue the ULIP, it would only wipe off the return earned so far and would result in a reduction of the corpus.  

It would only make sense if Mr Mehta invests in ULIP at an early age and only a part of his targeted investment amount.

Suppose Mr Mehta wishes to invest in Mutua Funds it will Give him following results 

1. Mutual fund Investment is directly related to the market and hence the investment would always be subject to market risks.
2. However, since the entire investment would be directed towards corpus, it would result in wealth building.
3. It will not have any additional insurance cover 
4. ELSS will have tax benefit as well and would earn a decent rate of earnings 

An ideal plan would be as below for Mr Mehta

1. Opt for ULIP for 1/4th of his target investment amount which would give him leverage of diversified investment bucket. Suppose he opts for Rs.50,000/- ULIP annually, then it would give him an effective rate of earnings of 10% maximum and insurance cover of Rs.5 lakhs to 7 lakhs. However, this money will be locked in and would be able for withdrawal only after 6-7 years depending upon terms and conditions.
2. Choose a mutual fund based on the risk appetite and financial goal. An equity-based mutual fund or Index funds have the lowest Expense ratios. Also, they have the safer potential of earnings since they are directly linked to markets. Mr Mehta in this case can go for the lumpsum investment of almost 50-60% of target investments or through SIP plan. 
3. Mr Mehta can consult with Insurance Advisor for additional insurance cover which would be sufficient for his age. Ideally, he should choose an insurance cover of almost 10 times of his annual income which would be Rs. 2 crores as his sum insured.

Liquid Funds Vs FDs, Which One You Should Go For?

What are Liquid Funds?

A liquid fund is a type of mutual fund which invests primarily in money market instruments, like treasury bills, commercial papers, certificate of deposits, and term deposits. They allow investors to park their funds for a few days or months as they have maturities up to 91 days.

Liquid funds can be made liquid at any time and earn returns for the holding period. Because they earn a return from market instruments, liquid fund’s returns can rise or fall depending on the market rates. For very short debt, Market interest depends on the liquidity situation.

What are Fixed Deposits?

A fixed deposit (FD) is a financial instrument provided by banks, that provides investors with a higher rate of interest than a regular savings account, until the given maturity date. The defining criteria for a fixed deposit are that the money cannot be withdrawn from the FD, as compared to a recurring deposit or a demand deposit before maturity.

The level of liquidity is very low. To compensate for the low liquidity, FDs offer higher rates of interest than savings accounts. The longest permissible term for FDs is 10 years.

Comparison For Liquid Funds Vs Fixed Deposits

• Liquid funds are easily accessible as compared to bank FDs. Bank FDs would penalize you for pre-mature withdrawal.
• Liquid fund returns in the last three years have been quite impressive as compared to fixed deposits. But going forward market liquidity could decide rates.
•  They do not have entry or exit loads.
•  Lowest interest rate risks, as they invest in short-term fixed-income debt securities.
•  Highest return compared to fixed deposits. It would range between 4% to 8% per annum.
• Liquid funds come with various plans like growth plan, dividend plans, daily dividend plans, weekly dividend plans, monthly dividend plans, etc
• Investors can invest in direct plans as they contain a low expense ratio and provide high returns.

Investors can choose good liquid mutual funds based on Crisil Rank, Value Research Star Rating, high Assets under Management (AUM), and past years performance.

Which One is Better?

1. Returns	Liquid funds invest in short-term securities and offer returns ranging between 5% to 8% per annum. On the other hand, bank fixed deposits offer 5% to 6.5% returns per annum, depending on the tenure. Lower the tenure, interest rates are lower. Liquid funds score higher compared to fixed deposits, for a short-term period of less than 1 year. If you invest for more than 6 months, the returns would be almost the same.
2. Tax treatment	If you sell a liquid mutual fund before 3 years, any returns need to be added to your income and you need to pay income tax based on your tax bracket. Hence, no change in tax treatment of liquid growth plans vs fixed deposits for short term.
3. Redemption	If you sell your liquid funds, you will receive the funds in your bank account on the same day or the next day, in the morning depending upon the time of redemption. On the other hand, fixed deposits closure can be done immediately. Most of the banks credit the funds immediately within the same day or the same hour.
4.Interest Rate Risk	Since liquid funds invest in short-term securities, RBI rates have an impact on such securities. On the other hand, bank fixed deposits also have an impact on interest rate risks. Most of the time, both go hand in hand, sometimes, banks do not charge any interest rates due to minor RBI rate changes.

Related article :- Postal Recurring Deposits Vs. Mutual Fund SIPs

Conclusion

If you want to park your money for a short term of 1 to 6 months, liquid funds would be the best bet for you. Consider the above factors before investing in such funds.

Gold Mutual Fund vs Gold ETF

In India, buying gold is more of a tradition than just investing. It is considered as a symbol of prosperity and luck. This auspicious metal has given good returns over the long term. When you create your wealth portfolio, it is suggested to allocate atleast 10-15% to Gold investment. This is majorly because this yellow metal is used to hedge against inflation and is also negatively co-related to stock market investments.

In other words, we can say that gold protects your portfolio from high volatility of equity markets. Thus it provides stability to your portfolio and often proves fruitful in times of crises.

How to invest in Gold?

There are multiple ways of getting exposure to gold asset class. Some of these are physical gold jewellery, sovereign gold bonds, Gold Mutual funds and Gold ETF.

For investment purpose, physical gold does not make much sense owing to high making charges and lack of safety.

If we talk about Sovereign Gold bonds (SGB), it is one of the best investment to increase your allocation to gold. However, it is suitable only to those investors who has a time horizon of 8 years. It comes with a lock-in period of 8 years and post which on maturity, the capital gains are tax free. Not only this, apart from capital gains, you are also entitled to receive interest of 2.5% p.a. These unique features make investment in SGB bonds very attractive.

If we see on the flip side, there are two major drawbacks of investing in SGB bonds. First is availability and second is liquidity. One can invest in these bonds only when it is available for subscription.

For an investor, who is looking for liquidity, Gold mutual funds and Gold ETFs will be the best option. It is considered better as you can invest here anytime of the year. It simplifies the entire gold investment process.

Investors often get confused between Gold Mutual fund and Gold ETF? Are you also getting a question in your mind – which is better Gold Mutual fund or Gold ETF?

If yes, let us discuss these two options in detail.

Gold ETFs

Gold Exchange Traded Funds invest in physical gold. The aim of Gold ETF is to track the price of domestic physical gold and invest in 99.5% purity gold bullion. Each unit of a gold ETF is equal to 1gm of gold. It is essential to note that it is backed by physical gold of very high purity which is stored in secured vaults.

These are listed on stock exchange and one can buy and sell gold ETF like stocks. Thus, it provides ample liquidity. Since ETFs are held in demat form, you need to have a demat account to invest in Gold ETFs.

Gold Mutual Funds

A gold mutual fund is an open-ended mutual fund scheme investing in units of gold ETFs. This does not require any demat account. Like any other mutual fund, there is complete flexibility and one can invest and redeem from gold funds anytime.

We can also say that Gold MFs are investing in Gold ETFs itself but indirectly.

Related article : Know Your Expenses When You Go For A Mutual Fund Investment

Gold MF Vs Gold ETF

Now that we are clear with the basic understanding, let us see the comparison between both of these options.

1. Cost – Investing in gold MF via broker is a little expensive compared to gold ETF.
2. Price – Gold MF units are priced at their respective NAV similar to any other mutual funds. NAV is updated on AMFI website on a daily basis from Monday to Friday. Price of gold ETF on the other hand is updated on real time basis just like stocks.
3. Mode of investment – SIP is available for Gold mutual funds whereas gold ETFs are not SIP based. You can still invest in gold ETF on a monthly basis to accumulate units. If you are a layman investor, it will be easy to invest in Gold Mutual fund. For seasoned investors who can study the market and take effective decisions on investments, Gold ETFs will be a better choice.
4. Type of Investment – Gold MFs invest in gold as well as other liquid funds. However, Gold ETFs invests almost 100% in pure gold and very minimal balance in debt.
5. Liquidity – Both these gold investment avenues are highly liquid. But some Gold mutual funds comes with an exit load which differs from fund to fund. Gold ETF has an edge here as there is no exit load.
6. Transferability – Gold ETF can be converted into precious metal whenever needed unlike gold mutual funds.

With this, we hope you now have a better clarity to distinguish between Gold ETF and Gold mutual fund. If your portfolio doesn’t have 10-15% allocation to gold, it is highly recommended that you do so now.

5 Factors To Consider While Making Lump-Sum Mutual Fund Investment

Though mutual funds are highly subject to market risks, despite it is one of the most lucrative investment avenues seen in the current market scenario. It can be seen that AMFI is highly promoting mutual fund investment through television commercials. When we talk about investment in mutual funds, the first & foremost thought that pops into our minds is SIP (Systematic Investment Plan). Even though, SIP is one of the safest and economical means of investment in a mutual fund; it is a tool for small players in the market. But if one has surplus funds lying idle, lump-sum or investment at once can prove to be a high yielding decision.

Factors to be considered before making lump-sum mutual fund investment

Parameter for Fund Selection

One of the most benevolent parameter as a reference for one-shot allocation of idle resources is the P/E (price per earnings ratio). Since equity mutual funds are a collection of shares, evaluation of funds on the basis of P/E ratio can be very helpful. P/E ratio is computed by dividing the market price per share (MPS) of the stock by its earnings per share (EPS). Suppose, MPS of stock A is Rs. 200 and EPS is Rs. 10, the P/E ratio is (200/10) = 20 i.e. stock A is trading at 20 times earnings.

P/E ratio of a mutual fund is the weighted average P/E ratio of all the stocks contained in the fund. The weights of the stocks are determined by their market values; let’s say, a fund consists of stocks of MN Ltd. worth Rs. 6,00,000 and PQ Ltd. worth Rs. 4,00,000, the total value of the fund Rs. 10,00,000, a weight of stock MN Ltd. is 60% and stock PQ Ltd. is 40%. If P/E ratios of stock MN Ltd. is 15 and stock PQ Ltd. is 10, then, fund’s P/E ratio is (0.6*15 + 0.4*10) = 13.  

From the investment point of view, a lower P/E ratio is preferable. This implies that the average price of the shares in the fund as compared to the earnings of such companies comprising the fund is low. Lump-sum investment is favorable when the markets are at a low so that one can gain when the market starts improving.

Time the Investment 

It is crucial to wait for the best opportunity to invest lump-sum in mutual funds in order to earn maximum returns. The best time for lump-sum investment in equity mutual funds is when the NAV (net asset value) of the fund is at its year’s low and there are probable chances to gain when the market takes an upturn. Investing when the NAV’s are low, larger units of a fund can be procured; this shall provide a broader base to earn when the fund makes an up-move.

Timing the market means how better one understands the market performance, predict the upcoming situation of the market, and allocate the resource when the best moment arrives. 

Purposive Investment 

The purpose of the investment should be to achieve the financial objective. If the investment is for the short term, it is better to invest in a liquid fund that is exposed to low risk and return and provides a hassle-free redemption option. Investment in a balanced fund is recommended for medium-term investment and for one having a long-term investment horizon, equity mutual funds can prove to be fruitful. Likewise, if the purpose is to save tax, then one can invest in ELSS funds which have a lock-in period of 3 years.

Must Read: – Top 6 things to avoid while investing in ELSS

Also, Mutual Funds require frequent monitoring to review whether the schemes are performing and attaining the determined objectives. Diversification of investment is necessary to reduce the risk that can arise from investment in a single fund if such fund starts deteriorating. Hence, funds churning and diversification ensures that the overall portfolio performs well despite any poor performance by a particular fund.

Consider the Tax Effect

Normally people invest in mutual funds by considering the return or yield capacity of the scheme, paying the least attention to the tax impact on the redemption of such fund. This can result in the drainage of a substantial portion of the gain made towards income tax. In the case of short-term investment; profit from investment in debt funds are subject to tax at the applicable slab rate and profit from equity-oriented funds are taxable @ 15%.

Profit from long-term investment, if the investment period is more than 3 years, debt funds attract a tax rate of 20% with indexation. However, Long-term capital gains from investment in equity-oriented funds are exempted from tax up to a gain of 1 lac. A realized gain of Rs. 1 lac and above in a financial year will attract a tax of 10%.

Systematic Transfer Plan (STP)

STP is a mix of SIP and lump-sum investment or a hybrid SIP. STP allows the periodical transfer of amount or units from one scheme to another of the same fund house, thus, helps in allocating funds at regular intervals.

One can target investment in an equity fund while remaining invested in a debt fund, thus ensuring high returns from equity funds and protection from part investment in debt funds.

The lump-sum mutual fund investment requires a cautious assessment of the factors affecting the market in which the investment is sought to be made. Resorting to these factors, you may be able to make a better investment decision.

Disclosing LTCG from Stocks, Equity Mutual Funds Simplified

Income Tax Returns (ITR) for individual taxpayers have to be filed by 31st Dec 2020. This means that it’s time to evaluate your finances and declare all sources of income, so your taxes can be filed correctly. While the process of filing your ITR has been one which has traditionally been riddled with complicated forms and procedures, the government has taken active measures in order to make this a more streamlined activity. The Union Budget has been introducing some radical changes which have come into effect in the last few years. While these changes may at first glance look very long drawn and complicated, they have in fact reduced the pressure for the taxpayer.

If You have not filed your Income Tax Return – File Now!

One such change introduced in the last few years is a relaxation of the rules of long-term capital gains (LTCG) disclosures. Earlier, when filing your ITR, you had to declare LTCG on each equity investment individually. However, since 2019, the Central Board of Direct Taxes (CBDT) brought into effect the rule that only the net consolidated amount generated through LTCG from equity-related investments need to be declared. For those taxpayers who earn over Rs.1lakh from equity investments during the financial year, this decision brings a great sense of relief. The paperwork associated with filing LTCG on equity investments of large amounts has been reduced significantly, thus simplifying the tax filing process.

Related Article: Know the Tax Treatment for Mutual Funds

What is the LTCG on Equity?

As per the Finance Bill 2018, LTCG from listed shares or mutual funds which are equity-oriented were liable to be taxed. On April 1, 2018, it was also announced that LTCG incurred through the sale of any instrument which has been held for more than 12 months will be taxed at 10% – with the exclusion of cess and surcharge – if the LTCG amount exceeds Rs.1lakh.

It is important to note here that LTCG up to Rs.1lakh is exempted from being a taxable amount. There is also something known as the grandfathering process, according to which if you have bought equity shares or mutual funds before 31st of January, 2018, the gain which has been calculated up to that date will not be taxed. Short-term capital gains (STCG), however, will still fall under the radar of taxes at 15%, with the exclusion of cess and surcharge.

Where do I disclose LTCG?

Apart from LTCG, another important thing that needs to be reported is LTCL or a long-term capital loss. This is important because after calculation, if LTCL is seen to exceed LTCG, not only will the tax on LTCG be nullified, the remainder of the loss incurred can be used in the subsequent 8 financial years to nullify against the capital gains earned.

LTCG and LTCL both have provisions to be disclosed in ITR-2 and ITR-3 forms, as per the CBDT’s mandate. There are specific columns where the taxpayer has to mention the net amount generated. For instance, if you are filing an ITR-2 form – for those HUFs (Hindu Undivided Families) or individuals who do not earn income from profits through profession or a business – LTCG must be disclosed in Section B4. Likewise, if you are an individual or HUF who earns income from profits via a profession or business, you need to file ITR-3, where Section B5 will allow you to disclose the details of LTCG.

All in all, we can say that the new reforms introduced by the government from time to time have been made keeping the ordinary taxpayer in mind. As the new rules are implemented stringently, it’s important to keep a track of all the changes which have been introduced so you don’t end up filing the incorrect taxes!