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As the Financial Year End is coming, you must be worried about your Income Tax burden and want to plan your taxes!!  Well, there are various options available under Sec 80C of Income Tax Act 1961 and an individual or an HUF can invest ₹150000/- in a Financial Year and claim the deductions. You can save upto ₹46800/- tax including cess of 4% for those in highest tax bracket of 30%.

The most popular options available under 80C are EPF (Employees’ Provident Fund), PPF (Public Provident Fund), ELSS (Equity Link Savings Scheme) Mutual Fund, Sukanya Samriddhi Savings Scheme, NSC(National Savings Certificate), Five Year Tax Savings Fixed Deposit with Bank or Post Office, NPS (National Pension Scheme), SCSS (Senior Citizen Savings Scheme), LIC Premium eligible under 80C, etc.

Though the most of the government saving instruments provide capital security and linear return (the return varies with the interest rate declared by government), they hardly provide any Inflation adjusted returns in long term. Only ELSS Mutual Funds can provide you market returns and investments also save taxes for you. So Let us understand the Advantages & Disadvantages of investing in ELSS Mutual Funds.

Advantages:-

1.   Professionally Managed: Funds are invested in the shares through a professional and highly qualified Fund Manager and can provide better returns than benchmark indexes in long term.

2.   Tax Savings: Amount invested in an ELSS fund is available for a tax deduction to the extent of ₹150,000 for the current financial year under section 80C of the Income Tax Act.

3.    Lowest lock-in period: Lowest lock-in period of only 3 year as compared to other Tax savings option.

4.   Benefits of Compounding: It is advisable to invest in ELSS fund with a investment horizon of more than 5 yea₹. Benefits of compounding are visible if you are invested for a longer horizon.

5.   Expectation of Higher Returns: ELSS funds normally provide 10-15% CAGR returns if invested more than 5 year or more horizons. The benefits of compounding coupled with returns from equity provide higher returns for investor in long term.

6.   SIP Investment Option: Option of investing Lumpsum as well as SIP is there.It is advisable to invest in SIP for rupee cost averaging concept where you purchase more units when the markets are down.

7.   Redemption not Compulsory: If funds are performing better, then one can stay invested for long term as there is no maximum investment duration. One can align the investments with different financial goals of life and redeem when the goals are fulfilled.

8.  Regulated by SEBI: ELSS Mutual funds comes under purview of SEBI and they need to make necessary disclosures and makes it very transparent.

Disadvantages:-

1.   Returns can be volatile in short term: As the funds are invested in Stock Market returns can be volatile and even negative in short term. Though in long term it provides better CAGR returns. So always invest with a long term view.

2.   3 year Lock-in: If you are looking for short term liquidity of your investments then you should avoid ELSS funds as there is a lock-in for 3 year.

3.   Tax benefits are limited:Tax benefits up to ₹150,000 are inclusive of other benefits under section 80C such as PPF, life insurance, repayment of home loan principal, among other. Meaning, if these deductions already amount to a sum of ₹150,000 then no deduction for an investment in ELSS scheme shall be available to the investor.

4.   Returns are tax free up to a extent of ₹ 1 lakh per annum: Long term capital gain tax in equity is exempted up to a extent of ₹1lakh per annum. Thereafter you need to pay 10% tax on your gains.

Best ELSS Funds Selection by Fundsvestment:-

*Mutual funds investments are subject to market risk. Please read the offer documents carefully before investing.
*Past returns do not guarantee future returns and returns can be volatile in short term.

Conclusion:

If you are looking for a long term Wealth Creating as well as Tax Saving tool then ELSS funds should be a part of your portfolio. Also it is advisable to do proper asset allocation according to risk tolerance and other long term goals through an expert and then only start investing.

Contact us for comprehensive Financial Planning and Asset Allocation strategy. Share this post and create financial awarness among your friend, family and loved ones.

Prepared By,

Somen Mazumder

CFP^CM, CII Award UK, MBA(Fin)

Chief Planner - Fundvestment