Article | Sip - Feb 14, 2017 | 18:04 PM
As the financial year draws to an end in March, it is not uncommon to see frantic tax-saving activities. Yet, more often than not, individuals in a rush to reduce their tax liabilities often make hasty and poor investment choices. In the daily humdrum of life, most of us are guilty of waiting till the last few weeks before the deadline expires.
But then it can be otherwise. There are quite a few options available for tax savers as Section 80C of the Income Tax Act allows individuals to invest an amount up to Rs 1,50,000 per annum which is from taxable income. If income falls in the taxable bracket, you should utilise this section to avail the maximum benefit.
One of the options, an investor, can consider is an equity-linked savings scheme (ELSS). They are a type of mutual fund scheme which provides tax benefits under Section 80C. As the name suggests, more than 65% of the portfolio contains equity holdings, thereby usually giving the investor the dual advantage of capital gains and tax savings. Typically, an ELSS fund manager will invest in a diversified bunch of equity and equity-related instruments. One of the salient features of an ELSS is that it has a three year lock-in period and offers both growth as well as a dividend option.
Who should invest in them?
ELSS is an investment tool for individuals seeking tax benefit under Section 80C and have a moderate to high risk tolerance. Because it is an equity fund, the potential returns from the scheme are largely determined by the market. Ideally, there is no age limit to start investing in an ELSS. This can also be a good starting point for a new investor as it will give them exposure to equity markets and the lock-in period will ensure they maintain fiscal discipline. Since one of the best ways to invest in a fund is via SIPs, investors can consider this route as it helps avoid any last minute rush. Retired individuals can also invest in these funds, but as they are volatile compared to traditional instruments, thorough research is recommended before taking the plunge. Before investing in any fund, always check the fund manager’s performance, the portfolio of the fund, and the expense ratio of the fund.
Talk about ELSS and the main comparison is with National Pension Scheme (NPS) and Unit Linked Insurance Plans (ULIP). ULIP is an insurance plan which invests the premium in equity or debt. The premium paid for this scheme is tax deductible under Section 80C though it is subject to certain conditions. Most ULIPs have a lock-in period of 10 years or more. NPS, on the other hand, is a retirement solution and not exactly a savings option. It has only limited exposure to equity and a very long lock-in period which can be extended till the investor’s retirement. Also, lump-sum withdrawal can be taxable.
The argument is skewed towards saving tax and investment comes as a secondary concern. The primary concern for an investor should be to gauge the pros and cons and understand what they are getting out of the investment. At the end of the day, tax savers are long-term investments first and tax savings should come in secondary.
Any ELSS investment up to Rs 1,50,000
Equity investments are always considered volatile over shorter durations. However, it is important to note that equity funds have mostly outperformed the market in the long term aiming higher returns than traditional investment instruments. Since ELSS has a mandatory lock-in period of 3 years, the risk is considerably lower. Also, it is not compulsory to redeem the amount after maturity as the investor can continue with the investment if they desire to do so.
When one takes inflation into account, traditional investment routes are sub-optimal due to the fixed interest rates and the falling value of the rupee. The best course of action is to check the amount you would have left of the 1.5 lakh limit at the start of the year, split into 12 amounts and start a SIP without further delay.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully
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