Any person earning Income has to pay tax. So why are we waiting for the last-minute rush, tax planning and investing to save taxes should not be left for the last minute. Better to start now, this way one can get ample time to carefully plan your tax which will enable us to achieve our target of Tax saving and also helps to accumulate wealth for our future.
There are various tax savings options available under section 80 C of the Income Tax Act, 1961. Now the next step is to figure out the option which offers the highest possible returns.
Here we are going to discuss few such investments which are good tax-saving instruments and simultaneously helps to create wealth in a long term:
- Equity Linked Saving Scheme (ELSS)
Equity is the best investment option that offers a kind of wealth creation opportunity. It holds the potential to beat inflation and generate long-term wealth. However direct investment in stocks does not offer a tax-saving advantage and it is subject to a highly volatile market that needs lots of expertise to create wealth out of it. That is where Mutual Funds come because one can leverage the power of investing in equity but leave the expertise required for equity investing to the domain experts for small fees.
Equity Linked Saving Scheme (ELSS) is one of the best options in the given scenario. ELSS funds are diversified Equity Mutual Funds. One of the important advantages is it has a mere 3 years Lock-in period which is the lowest among other tax-saving instruments at the same time it gives the highest returns.
ELSS funds primarily invest in Equities and Equity Linked Instruments, across the market in terms of sectors and market cap.
Liquidity is also one of the factors of evaluation, the 3 years lock-in with ELSS funds may be a better option for most investors because your money is far more liquid than in other investments.
Due to 3 years, lock-in period Fund Managers can generate better returns because they can take long term strategic decisions as opposed to short term moves in response to investor behaviour when the market is volatile.
SIP in ELSS:
Another good option is to invest in ELSS via SIP. Here one can invest regularly as per our financial goals and it also benefits from averaging during times of volatility.
One can also gain from the power of compounding, which is one of the next best options in building wealth creation. As per the growth option in ELSS funds you stand to benefit from the power of compounding.
E.g. If we invest Rs.5000/- per month (SIP) for 15 years in ELSS then the total investment was only Rs. 9 lakhs and the returns after 15 years would have been Rs.44.5 lakhs.
- Public Provident Fund (PPF)
When people think of building a corpus for their retirement, the first thing that comes to their mind is by contributing to the Public Provident Fund. Public Provident Fund is one of the safe options of investment as it is backed by the government. It gives a fixed rate of Interest annually (7.1% per annum – at present). However, with the current changes proposed in Union Budget 2021, the interest earned will be taxable if the annual contribution is Rs.2.5 lakhs and above.
It is available in all post offices and all public or private sector banks.
The Frequency to deposit in the PPF account is also as per the tax payer’s requirement ie. One can deposit either a lump-sum amount or in instalments during the Financial Year.
E.g. With an investment of only Rs. 5000 per month at 7.1% per annum one can receive approx. Rs. 16.7 Lakhs after 15 years.
It is suitable for investors who want to avoid risk, save for long term goals like child education, marriage, etc without worrying about any capital loss.
Must Read: Portfolio Management Services in India
- Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child launched as a part of the “Beti Bachao Beti Padhao” campaign. One of the reasons why this scheme has become popular is due to its tax benefit. It is again backed by the Government so it is preferred by those taxpayers who want to save tax and get good returns without capital loss.
Though this option is available only to those who have a girl child, it is a good tax-saving instrument that fetches the highest rate of interest (7.6% per annum) and also creates corpus in the long run which enables the taxpayer to achieve their financial goals like girl child marriage or for her study purpose.
A Sukanya Samriddhi Account can be opened any time after the birth of a girl child till she turns 10, where you will have to deposit a minimum of Rs.250/- and a maximum of Rs. 1.5 lakhs can be deposited during the financial year. The account remains operational for 21 years from the time it is opened or until the girl in whose name it is opened gets married, after she turns 18 years.
It comes with exempt-exempt-exempt (EEE) status as its annual deposit qualifies for Sec 80 C benefit and maturity proceeds are also non- taxable. The Interest received is also exempt from Tax.
- National Pension Scheme
As the name suggests National Pension Scheme is dedicated solely to retirement planning. It is a pension cum investment scheme launched by the Government of India for the age from 18 to 65 years. NPS is also a good option for wealth creation as your money gets invested across asset classes like equity, Government/corporate bonds, etc.
Here one can have the choice to select our asset allocation which follows an age-based asset allocation model depending on our risk appetite.
It has the dual benefit of investing for retirement and also the best tax saving instrument as it qualifies for EEE status.
Hence the National Pension Scheme can be a good option for those who are not comfortable making investment decisions on their own then such a tailor-made solution can be the best choice and will also build a corpus for their retirement.
- Fixed Deposit Scheme
Fixed Deposits are one of the safest investment options, especially when one compares them with stocks or other market-linked instruments. As the volatility is low the corpus that one set aside in Fixed Deposits serves as a great way to ensure that your capital is safe.
For the investor who is just starting with different investment options, then investing the same amount as your capital is an easy way to arbitrage your risks and receive an assured amount at maturity.
One can also start saving at an early age and multiply wealth with the power of compounding.
- United Linked Insurance Plan
United Linked Insurance Plan is a combination of savings and protection. Along with providing Life Insurance it also helps to channelize one’s savings into various market-linked assets for meeting long term goals.
A Minimum lock-in of 5 years is long term, which ensures investors generating good market-linked returns.
It is good to stay invested in these schemes for a long-term period of say about 10 years or more. Over the long term, ULIP is expected to generate returns ranging from 10% to 12%. The returns from the best ULIP are better than other market instruments like FD’s, NSC’s, PPF, etc. Best ULIP can also beat inflation in the long term.
One can also get a brisk return by exercising the option of fund switching in ULIP’s due to long term investment.
The amount received on maturity is exempt from taxation u/s 10 D of Income Tax Act, 1961. Along with this tax relief, one can also avail of tax benefits on premiums paid up to a maximum of Rs.1.5 lakhs u/s 80 C of Income Tax Act, 1961.
Thus, the objective of wealth creation over an investment horizon of 10 years can be fulfilled by investing in the best ULIP.
It is wise to think of investing beyond the traditional ways of saving tax like, investing in Fixed income tax saving instruments like FD, PPF, or endowment life insurance plans etc. Plan for other options like ELSS, ULIP, etc based on the risk appetite and other relevant factors as discussed above of an individual.
With many options available when investing for wealth creation and saving tax at the same time can be easily achieved by making the right choice at the right time and getting started with it at the earliest.
What are ELSS Funds?
Equity Linked Saving Schemes (ELSS), popularly known as tax saving mutual funds, are equity-oriented mutual funds. As per the SEBI regulations, ELSS funds have to invest at least 80% of their corpus in equity or equity-related instruments.
These funds come with a lock-in period of 3 years and qualify for tax deduction under Section 80C. Investments in ELSS of up to Rs 1.5 lakh per financial year can be claimed as tax deduction under this Section.
Why invest in ELSS funds for saving tax?
ELSS schemes have superior product features than other tax saving investment options under Section 80C like PPF, ULIP, NSC and tax-saving bank FDs.
Higher returns: Even though equities as an asset class can be very volatile in the short term, they usually beat other asset classes including the fixed income asset class by a wide margin over the long term. Hence, being invested in equities, ELSS funds have the potential to generate higher returns other Section 80C instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) and tax-saving bank fixed deposits over the long term.
Shortest lock-in period: The lock-in period of ELSS funds is just 3 years, the lowest among all tax saving investment options eligible for Section 80C deduction. Among other Section 80C options, NSC and tax-saving fixed deposits has a lock-in period of 5 years. The lock-in period of PPF is also 15 years whereas the lock-in period in the case of ULIPs is 5 years. Thus, ELSS funds offer the highest form of liquidity among all tax saving investment options.
As ELSS funds offer the greatest potential of creating wealth over the long term, these can be an excellent tool for achieving long term financial goals like children’s education fund and post-retirement corpus with contributions lower than its fixed-income alternatives.
The 3-year lock-in period in ELSS funds also reduces the redemption pressure for their fund managers during volatile markets. This allows their fund managers greater flexibility to take a more long-term view while dealing with market volatility with respect to other open-ended funds.
Best ELSS funds for tax saving in 2020-2021
1. Mirae Asset Tax Saver Fund
- Aims at building a diversified portfolio of strong growth companies at a reasonable price across market capitalization, themes and investment styles
- Uses a bottom-up approach for stock selection driven by value investing in growth-oriented businesses
- Investment decisions are based on broad analyses of the macroeconomy, business cycles and industry trends
- Prefers companies with high return ratios, robust business models and sustainable competitive advantages over their competitors
- Aims to invest in a large base of stocks to avoid concentration risk
- Monitors the trading volumes of identified stocks before investment to avoid liquidity risk
2. Aditya Birla Sun Life Tax Relief 96
- Uses a combination of bottom-up and top-down approach for stock selection
- The top-down approach helps in analyzing changing economic trends, key policy changes, macroeconomic factors, infrastructure spending, etc
- The bottom-up approach is used to identify companies with a strong competitive position in good businesses and stable management focused on long term fundamental growth
3. Kotak Tax Saver
- Uses a bottom-up approach for stock selection across market capitalization
- Invests in stocks priced at a material discount to their intrinsic value
- Prefers companies with strong financials, reputed management and relatively less susceptible to recession or business cycles
- Also prefers companies with strategies to build strong brands and franchises
Related article: How ELSS is better than any other Tax saving scheme?
4. Axis Long Term Equity Fund
- Invests in quality businesses with a long-term approach
- Uses a bottom-up approach for stock picking
- Can invest across market capitalization, usually in a mix of large caps (around 50-100%) and select midcaps (up to 50%)
- Quality and long-term earnings growth prospects are also used for stock selection
- Uses a research process based on fundamentals to analyze the growth potential of stocks having strong business models and sustainable competitive advantages over their competitors
5. Motilal Oswal Long Term Equity
- Follows an investment style and philosophy based on the ‘Buy Right: Sit Tight’ principle
- ‘Buy Right’ refers to buying quality stocks at a reasonable price
- ‘Sit Tight’ refers to remain invested for a longer time to realize the maximum growth potential
- Follows bottom-up approach for stock selection
- Uses a benchmark agnostic approach to build a portfolio consisting of high conviction stock ideas and low portfolio churns
- Believes inadequate diversification with a smaller number of stocks
Important points to select the best ELSS funds:
- Compare the past performance of 3-, 5- and 7-year periods while making fund-selection. While no one guarantees past performance in future, comparing their past returns can help in depicting how they coped with various market conditions.
- Don’t wait for the last quarter or month of the financial year for investing in ELSS. High valuations in the equity market at that time, if any, would cost you more for the ELSS fund units. Instead, opt for the SIP option to spread your investments across the year and benefit from cost averaging during a market correction, if any, in the interim.
- Don’t opt for the dividend option. Instead, opt for the growth option to benefit from the power of compounding. Dividends are also taxable at the hands of investors as per their tax slab.
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 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 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.
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 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.
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?
|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|
|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|
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.
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.
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.
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.
“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
|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|
*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.
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
- Comparatively lower returns
- No inflation factoring of returns
- 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
- Loss of principal due to market risk
- Unguaranteed returns
- Alternatively, Mr Iyer can divide his investment in PPF and ELSS to reap higher returns and square off the losses.
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.
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?
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.
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.
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
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.
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 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
- Its own historical performance
- 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.