Topic 3: Saving Tax Through Mutual Funds
By most measures, Equity-Linked Savings Schemes are better tax-saving choice
Compared to other allowable investments, ELSS funds are uniquely advantageous. There are two reasons for this. One is that ELSS funds are unique in being the only viable tax-saving investment within this Rs.1.5 lakh limit that brings the benefits of equity returns. Sure, there are two other options that give equity-linked returns- ULIPs and the National Pension System (NPS).
The NPS is a retirement solution rather than a savings one. For one, it has only partial exposure to equity, and secondly, it has a very long lock-in period that effectively extends till retirement age. There's no way a three-year lock-in product like the ELSS can be compared to the NPS. As it exists, returns from the NPS are taxable.
ELSS funds actually have the best combination of much lower cost than ULIPs, 100 per cent equity as well as a reasonable lock-in period of just three years. Beyond this, ELSS funds have another hidden benefit. For many beginner investors, it makes an excellent gateway product in which they get the first taste of equity investing and of mutual funds. You end up investing in these funds because the tax-savings attracts you and it has the shortest lock-in. This experience encourages investors to invest in equity mutual funds over and above their tax-saving needs. Once you have a taste of long-term equity returns, then you end up trying other types of equity investments as well.
For the best way to choose ELSS funds, one should plan ahead and not wake up to tax-saving investments late in the year. For a variety of reasons, savers tend to make hasty and poor decisions while choosing their tax-saving investments.
For one, many of those who wait till the end of the year are those who don't make any discretionary investments other than the tax-savings. They're inexperienced in this whole activity and make a foray into investing only once a year, generally to fall prey to the first salesman who comes along. As long as an investment saves tax, they feel that the immediate job is done.
This approach proves expensive in the long run. A good tax-saving investment must be an investment first and a tax-saver later. For most people, the investment that should make most sense is in an ELSS fund. This is because salary-earners generally have some of the permitted amount going into fixed income through PF deductions and to balance that, equity is advisable. There's a widespread misconception that equity is too risky for older investors or for retirees and therefore they should not use ELSS. Nothing could be further from the truth. Everyone who has taxable income should invest in ELSS to save taxes.
Of course, like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. That's also the way to avoid any last-minute rush. At the beginning of every year, estimate the amount you have left over from the Rs.1.5 lakh limit after statutory deductions, divide it by 12 and start an SIP.
Source: valueresearchonline.com
Compared to other allowable investments, ELSS funds are uniquely advantageous. There are two reasons for this. One is that ELSS funds are unique in being the only viable tax-saving investment within this Rs.1.5 lakh limit that brings the benefits of equity returns. Sure, there are two other options that give equity-linked returns- ULIPs and the National Pension System (NPS).
The NPS is a retirement solution rather than a savings one. For one, it has only partial exposure to equity, and secondly, it has a very long lock-in period that effectively extends till retirement age. There's no way a three-year lock-in product like the ELSS can be compared to the NPS. As it exists, returns from the NPS are taxable.
ELSS funds actually have the best combination of much lower cost than ULIPs, 100 per cent equity as well as a reasonable lock-in period of just three years. Beyond this, ELSS funds have another hidden benefit. For many beginner investors, it makes an excellent gateway product in which they get the first taste of equity investing and of mutual funds. You end up investing in these funds because the tax-savings attracts you and it has the shortest lock-in. This experience encourages investors to invest in equity mutual funds over and above their tax-saving needs. Once you have a taste of long-term equity returns, then you end up trying other types of equity investments as well.
For the best way to choose ELSS funds, one should plan ahead and not wake up to tax-saving investments late in the year. For a variety of reasons, savers tend to make hasty and poor decisions while choosing their tax-saving investments.
For one, many of those who wait till the end of the year are those who don't make any discretionary investments other than the tax-savings. They're inexperienced in this whole activity and make a foray into investing only once a year, generally to fall prey to the first salesman who comes along. As long as an investment saves tax, they feel that the immediate job is done.
This approach proves expensive in the long run. A good tax-saving investment must be an investment first and a tax-saver later. For most people, the investment that should make most sense is in an ELSS fund. This is because salary-earners generally have some of the permitted amount going into fixed income through PF deductions and to balance that, equity is advisable. There's a widespread misconception that equity is too risky for older investors or for retirees and therefore they should not use ELSS. Nothing could be further from the truth. Everyone who has taxable income should invest in ELSS to save taxes.
Of course, like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. That's also the way to avoid any last-minute rush. At the beginning of every year, estimate the amount you have left over from the Rs.1.5 lakh limit after statutory deductions, divide it by 12 and start an SIP.
Source: valueresearchonline.com