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Watch the Swatantra TV Series to learn about various investment options in mutual funds that can help teachers have a financially secured future. Witness an engaging session with Mr. Lalit Nambiar, Fund Manager and Head Research, UTI AMC & Mr. Satish Pandey, MD & Head, Private Wealth Management,.... Show all Video
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ELSS has an edge over other tax saving options
Published On , 12 Dec 2017 By TOI
With just about three and a half months to go before the fiscal year ends, mutual fund industry is expecting a rush of money into tax saving funds with equity linked savings schemes (ELSS) leading the charge. A booming stock market__with the leading indices near their all time highs__could help that cause.
This is also the time investors look for an answer about which are the better tax saving instruments in the market. There are nearly 10 financial products which are approved by the government to quality for tax saving instrument under the Income Tax Act. These include ELSS, NPS, PPF, EPF, post office saving instruments, bank FDs, insurance products and some others.
A comparison of these products under various parameters could give investors a better idea about the better ones. To start with, ELSS have the shortest lock-in period of three years, compared to other instruments with minimum five years for bank FDs, 15 years for PPFs and for the life of the policy for insurance products.
The table below can give you comparative parameters for various tax saving instruments: Financial planners and advisors say that ELSS is the best option to save taxes, provided the investor has the requisite risk profile. The expected return from investing in ELSS is higher in the long run than any other comparable product. Also ELSS provides higher flexibility to investors, in terms of diversification across mutual funds which offer diverse investment style. In most other products, there is hardly any scope for diversification. Also if you invest in an ELSS once and then for some reason you can not invest any additional amount, the money is never lost. In contrast, in insurance there is a chance of you losing your entire investment.
ELSS AS A WEALTH-CREATION ACCELERATOR
The main objective for investing should be wealth creation, for which one should look at asset allocation, while tax saving should be the accelerator, say fund managers and financial advisors.
According to investment professionals, the wealth creation acceleration process works this way: Suppose as an investor, given your profile and risk-taking ability, your asset allocation plan allows you to invest in an equity fund. On top of that you also have the option to save some taxes by investing in tax saving products. Now the equity fund you select is an ELSS which is expected to give an annual return of 15% over the long run. On top of this, by investing in this fund you can get an additional benefit of say 3%, which accrues because of your lower tax outgo. So the average annual long term return could go up to 18%.
On the other hand, while investing, if tax savings becomes your primary objective, the returns may suffer. For example, in the long run bank FDs which qualify for tax savings would mostly likely give lower returns than ELSS, fund industry officials say.
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