Tax saving mutual funds or ELSS is one of the best tax saving investment options. Under section 80C there are many schemes of tax saving. You can get tax advantage of the investment insurance schemes, PPF, Tax Saving FD and NSC. All of these schemes have their positives and negatives, but tax saving mutual funds or Equity Linked Saving Schemes (ELSS) are the best tax saving instrument for those who can take some risk. The young and aggressive investor must invest in equity linked saving scheme (ELSS) to enjoy the benefit of tax saving and better returns.
Why I should Choose Mutual funds for Tax Saving
I do agree that insurance policies are most popular tax saving schemes. I do agree that NSC and tax saving FD is the most reliable tax saving option. I also Agree that A PPF account should be the first tax saving instrument and one must open A PPF account. But I strongly recommend to invest in tax saving mutual funds -The ELSS. These are the best tax saving option for most of the us.
How ELSS Is A Better Tax Saving Option Than Insurance Schemes
1. ELSS Can Give Higher Return
Traditional endowment Insurance policies give some sort of guarantee. In these schemes, you remain assured of your money. But did you calculate the rate of return? These policies give less return than the increase in inflation. It means in the real term, you do lose some money.
2. Low Expense Charges in ELSS Than Insurance Schemes
Unit linked insurance policies promise to give the return, according to the rise of the stock market. But these policies deduct some charges. The total charges of ULIP are greater than the total charges of ELSS.
3. Short Lock in Period
In insurance schemes, money is locked for 5 years while in the ELSS it is locked only for 3 years. The lock-in period of Equity Linked Saving Scheme (ELSS) is lowest among all the tax saving option.
How ELSS is Better Than Tax saving FD
1. ELSS Has Short Lock in Period
Tax saving FD gives assured return. Opening a tax saving FD account is also very easy. But the money gets locked for 5 years against 3-year lock-in of ELSS.
2. Better Return In Equity Linked Saving Scheme
Tax saving FD gives a low return. Through this option, you can’t build wealth. In the long run, ELSS give you a far better return.
3. ELSS Gives More Tax Benefit
The interest income of Tax saving FD is taxable at the time of redemption. But tax saving mutual fund is exempt, exempt and exempt. It means no tax at the time of investing, during the earning of interest and at the time of redemption.
How ELSS Is Better Than PPF
Like Equity linked Savings schemes PPF also saves tax while investing, earning and redemption. But ELSS scores over PPF in some features.
1. Long Maturity Period Of PPF
PPF is also an EEE tax saving investment. There is no tax at any time. But you need to put your money for long 15 years. While it can work wonders for some, but you get less flexibility. Whereas ELSS gives you greater flexibility of redemption. You can take out your money just after the 3 years.
2. Average Return In PPF
The rate of interest of PPF is linked with 10-year government bond. So, you would not be able to beat the market. Your money will not grow rapidly. While, ELSS gives you growth of shares.
How ELSS Scores Over NSC
NSC is one of the oldest tax saving options. It is also very popular due to the ease and safety. But ELSS is better than NSC in some fronts.
1. Better Return
Like PPF the interest rate of NSC is also linked to 10-year government bond. Therefore, you can’t get more than average return. While ELSS can give above average return due to the investment in shares.
2. More Flexibility
NSC is of two duration 5 years and 10 years. It means you can’t take out your money before 5 years. While in the ELSS, you are free to redeem after 3 years.
When Should You Avoid Mutual funds For Tax Saving
As I said every tax saving investment option has some positives and some negatives. You need to know when shouldn’t you invest in tax saving mutual fund aka ELSS. Let us learn.
If You Can’t Stay Calm In A Volatile Market
Equity linked saving schemes do give the high return of the stock market, but it is associated with high risk as well. Share market is volatile by nature. Investment in shares can be a multi-bagger, but sometimes it can wipe your capital also. Similarly, ELSS can give you excellent return, but sometimes your investment can dwindle. If you can’t cope with this volatility, you should not invest in tax saving mutual funds.
If You Can’t Stay Invested For Long Period
Investment in tax saving mutual funds can go into negative. There can be months or years when your portfolio will be in red. At such times you need to hold the fort. You should wait for better times. Hence invest in equity linked saving scheme only if you can invest for the long term.
If You Can’t Choose The Good Schemes
Performance in share market depends upon the selection of stocks. Best performing stocks can give you a decent return in bad times as well while duds can wipe your money in good times. Therefore, stock picking is crucial.
Tax saving mutual funds, The fund manager do this stock picking for you according to the stated objective of the scheme. The performance of the mutual fund schemes depends upon the fund management company and fund manager.
To get the benefit from ELSS, Fund selection is very important. If you can’t choose good Equity linked saving scheme, You should not venture into this area. PPF and NSC would be a better option for you.
Also Read: How To Save Tax in India : 10 Hidden Ways
If you can take some risk, if you are not afraid of volatility, if you can remain invested for a long period, Equity Linked Saving Scheme is the best tax saving option for you. Invest into the Best ELSS and enjoy the profit.