5 MinsJanuary 22, 2020
Equity-oriented mutual funds offer market-linked returns, help to counter inflation and grow wealth. Hence, they are a potent investment avenue to accomplish your envisioned financial goals. A few categories of equity-oriented mutual funds also offer tax benefits. By investing in Mutual Funds you can claim a deduction up to a sum of Rs 1.50 lakh vide a deduction under Section 80C of the Income Tax Act, 1961.
Also Read: All you need to know about the types Of Mutual Funds
What is an Equity Linked Savings Scheme (ELSS)?
ELSS, also known as a tax-saving fund, is a diversified equity fund that offers the dual advantage of wealth-building potential and tax-saving benefits.
As per SEBI’s categorisation norms for mutual funds, ELSS is an open-ended scheme with a statutory lock-in of 3 years and tax benefit. ELSS invests a minimum
of 80% of its assets in equity & equity related instruments (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance).
Most ELSS funds hold a diversified portfolio and are usually market-cap and sector agnostic. To put it simply, the fund manager has the flexibility to invest across market capitalisations (large-cap, mid-cap, and small-cap) and sectors. And in
terms of investment style, an ELSS may be of any genre. Meaning, the fund may follow a growth or value style or even a combination of both.
The benefit of investing in ELSS is that, when compared to other tax-saving investment instruments, it has the least lock-in period.
ELSS - can potentially to earn better returns with the least lock-in period
|Tax Saving Instrument||Returns||Lock-in period|
|Equity-Linked Saving Scheme||Market-linked||3 years|
|National Saving Certificate ||7.90%||5 years|
|Tax Saver Bank FD ||6.50%*||5 years|
|Senior Citizens Savings Scheme||8.60%||5 years|
|Public Provident Fund||7.90%||15 years|
|Sukanya Samriddhi Yojana||8.40%||21 years|
|National Pension Scheme||Market-linked||Till 60 years of age|
# Rate of interest from October 1, 2019, to December 31, 2019 for all small saving schemes
(Source: Department of Economic Affairs)
*Axis Bank 5-year FD rates. Rates vary from bank to bank
Going by the table above, if you do not want to commit your money for a very long period, say 5 to 15 years or more, while you aim to save tax, then ELSS is a worthwhile investment option. However, ensure that you have a time horizon of at least
3 years and are comfortable with the ups and downs in the market.
In comparison to other fixed income tax-saving avenues such as National Savings Certificate (NSC), Tax-saver Bank FD, Public Provident Fund, etc., ELSS holds the potential
to reap better market-linked returns.
The other market-linked tax-saving product, the National Pension System (NPS), is passively managed and, therefore, delivers returns in line with the benchmark index. Unit-linked Insurance Plans (ULIPs) too offer tax benefits plus market-linked
returns. But since it combines insurance with investments, it is advisable for those who are looking for risk-protection along with returns.
If you are worried about volatility in ELSS, take the SIP route to invest. This can help to mitigate the volatility. You can benefit from the rupee-cost averaging feature while you endeavour to compound wealth. But do note that every instalment
in an ELSS SIP will be subject to a lock-in period of 3 years.
When you pick ELSS for tax-saving, make sure you buy the best ones with a consistent performance track record and from a fund house following robust investment processes.
Keep in mind, investments in equities take time to grow and generate meaningful returns. Give your ELSS investments a time horizon of at least 3 years.
You see, even after the imposition of 10% LTCG tax (without indexation) on capital gains over Rs. 1 lakh, equity-oriented mutual funds can earn you decent post-tax returns.
What is a Retirement Fund?
This is a type of mutual fund that is not just useful from a tax planning point of view, but also for retirement planning –an important life goal.
[Also Read: The Prudent Approach to Your Retirement Planning]
SEBI has allowed mutual fund houses to offer Retirement Funds categorising them as ‘solution-oriented’. As per regulatory requirements, these funds are open-ended, but have a lock-in period of ¬5 years or till retirement age, whichever
The merit of investing in a Retirement Fund is that they qualify for a deduction under Section 80C of the Income Tax Act, 1961. But given the 5-year lock-in period, you need to be extra careful while choosing a retirement fund, because if the
scheme underperforms there’s no option to switch during the lock-in period.
Therefore, evaluating the schemes’ features, performance track record, and the portfolio characteristics, is important. Furthermore, you need to pay attention to your investment time horizon before you retire, so that liquidity is accessible
when you actually need the money.
When you deploy your hard savings in the endeavour to generate wealth, take into consideration the tax implications. Select the right mix of investment products, and ideally, complement investment planning.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.