The goal to secure your future can take a backseat if the investments are not tax-friendly. The gross proceeds of the investment may seem very impressive. But, when the tax is applied, the returns get a lot shorter than you would expect. The attack of tax sways many away from investing. However, the market has a slew of tax-friendly products such as tax-saving mutual funds, tax saver bank fixed deposits, public provident fund, etc. These products save an income tax of up to ₹1.5 lakh in a financial year. But, which is the best tax saving investment option? Well, if you ask our opinion, the tax saving mutual funds would gain our trust and vote. The reason why Equity-linked Savings Scheme (ELSS), the tax saving mutual fund, holds aces over its competing products is elaborated below. The Utility of ELSS ELSS is an equity mutual fund product that offers the following advantages. Scope for High Returns - ELSS offers scope for a brighter future as the investments made here are diverted into the high return proposition of equities. With ELSS, double- digit returns are always a possibility. Although returns are not fixed with ELSS, investors can generate an average return of 12%-15% over the long term investing in the said scheme. Its competing products, such as tax saver FD and public provident fund (PPF), can come with a return of 7%-8% and 8%, respectively. Inflation-adjusted Returns - The word ‘inflation’ makes the returns from most investments much shorter to live through the uncertainty of life. At the face of rising expenses, traditional investments like FD and provident fund won’t prove sufficient. This is where the ELSS can be better by providing returns in line with inflation. Shorter Lock-in Period - ELSS investments come with a lock-in period of 3 years, much shorter than its competing products. While the tax-saver FD comes with a 5-year lock-in period, PPF investments will be locked for 15 years. No Investment Cap - Tax-saving products other than ELSS come with an investment cap of 1.5 lakh in a financial year. With ELSS, you don’t have any cap on the maximum investment limit. As there’s no cap, chances of you building a large corpus are much more with ELSS compared to other tax savers. ELSS Investments Come Under the Watchful Eyes of Fund Manager - The asset management company (AMC), whose ELSS you would subscribe to, has a fund manager having years of experience of portfolio management. The investments will keep getting shuffled around different securities at different proportions to diversify the invested capital. The fund manager would use the research insights and the market trends to manoeuvre the investments to earn you greater returns. Things to Keep in Mind While Investing in ELSS You can do well to keep the following things in mind while investing in ELSS. Ensure Your Risk-taking Capacity is on the Higher Side - If you get affected by the short-term market fluctuations, then ELSS is not for you as stocks can come down in value. So, you must have a bigger risk-taking appetite to be able to invest in ELSS without any worry. Long Time Horizon is Vital - You must stay invested for long if you are putting your money in ELSS. You may be tempted to withdraw your investments as soon as the lock-in period expires after 3 years. But, if you want to achieve the fruition of ELSS investments, make sure to invest longer than that. Understand the Implication of SIP and Lump Sum Investments in ELSS - Yes, the lock-in period is 3 years in case of ELSS. But the withdrawal dynamics can differ according to the mode of investment. Lump sum investments made in ELSS can be withdrawn after 3 years. In the case of SIP, the redemption would be on the basis of the time of the installment. So, if you invest 5,000 in SIP in July 2019, the same can be redeemed in July 2022 and so on.
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Anika Sharma
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