Moneycontrol
Apr 12, 2017 02:49 PM IST |

Why tax saving mutual funds score over other tax saving options

Why tax saving mutual funds score over other tax saving options

Vijai Mantri

Section 80 C of Income Tax Act is a very crowded section with plethora of schemes clubbed together capping tax deductable amount at Rs.1,50,000 per tax payer in each assessment year.

Given this challenge, how does one get maximum bang for his/ her buck is the question. I ventured out to analyse various options and chose one which in my opinion works best for the investors. Though the conclusion in the end is already given away by the title of the article but it does not take away from the process followed to arrive at it.

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Assured return options

These include bank deposits, PPF, NSC etc. The biggest appeal for these products is their simplicity, familiarity, assured returns and government guarantee. But all of this is at the cost of very low returns.

Market linked options

These include traditional insurance option, ULIPs, contribution to NPS and ELSS.

Insurance is meant for protection but is incorrectly sold as an investment option. Traditional insurance schemes deliver returns which are not even inflation beating.  Beside low returns, an investor needs to commit regular investments for many years thereby compromising on the flexibility and liquidity in future.

Non traditional investment options like ULIP give returns which are market linked but again an investor needs to commit funds for many years and exit is not very efficient. It is also a known fact that these products have high charges which reduces the returns for the investor.

NPS as an option which deliver market linked returns but the challenge is the long term commitment and limited exit window. Also the option available in NPS commits funds only in index fund and substantial part get’s invested in debt market which for a long term investor is not very efficient.

If you have to invest in equity than open ended diversified mutual funds are far better options. And for the debt portion debt mutual funds and PPF are preferable options.

Given these constraint in all above mentioned options, ELSS score much better for following reasons.

1.    Lowest lock-in period:  Compared to all other above mentioned options ELLS has shortest lock-in period of three years compared with 5-15 years for most alternates.

2.    Flexibility : Investor may diversify his/her  investments across various ELSS in a given year but you may opt for different ELSS option each year based on the performance of MF schemes. Choosing one ELSS scheme does not mean that you have to invest in the same schemes year after year.

3.    Returns: Historically ELSS has delivered far better returns than all the alternate as can be seen from below table.

4.    The only challenge which ELSS has is the returns can be volatile but volatility is only for short term and there are ways to control volatility in the following ways.

(i)SIP : Investment through SIP not only reduces the volatility of your portfolio but also makes volatility works for you. SIP has inherent advantage of buying more when prices are lower and buy less when prices are higher.

(ii) Long Term : The volatility in the equity market start reducing as the holding period start to increase and finally it stop making any negative impact on the portfolio of investors. In the long term equity make power of compounding start working in favour of investor.

Here is a chart which showcases power of investing in ELSS through SIP and for long term.

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15 year return as on Dec 2016 (SIP of Rs. 10,000 p.m.)

Source: BuckFast Research

Here we can see that even if you happen to invest in worst performing ELSS scheme over last 15 years you have made returns which are much better than PPF.

In the nutshell better flexibility and liquidity along with power of equity makes ELSS a better option to invest for tax savings.

The writer is Chief Mentor and Co-Founder of Buckfast investment Advisory Services
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