Towards the end of every financial year, there`s always the mad rush for tax-saving avenues. As per Section 80CC of the Income Tax Act, one is eligible to get tax rebate on an investment of up to Rs 1 lakh (1.2 lakh from the next financial year) in any of the available tax-saving options. Historically, the popular tax-saving options used to be Provident Funds (PF), National Saving Certificates (NSC), Kisan Vikas Patra (KVP), etc. This trend has changed drastically in recent times especially with the emergence and success of Tax-saving mutual funds in India.
Tax-Saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), are essentially mutual funds that invest in equity. The fund manager of an ELSS fund invests all (or most) of his funds in the equity market and hence returns will be based on the performance of the stock market. Therefore, a Tax-Saving fund not only provides tax benefit but also gives one the opportunity to explore the equity market. Also, among all tax saving options, it carries one of the lowest lock-in of three years. The NSC has a lock-in of 6 years, PF (15 years) and KVP (over 7 years). Recently, 5-year bank fixed deposits have also been recognized by the government as one of the tax saving options.
Currently, there are more than 35 Tax-Saving mutual funds in India to choose from and the performances of most such funds have been consistently good. For example, over the last 5 years, tax-planning funds have on an average delivered returns of around 15% per annum. And over the last year, the return is a very high percentage! The other tax-saving investment options like PF, NSC, KVP and Bank fixed deposits fetch around 7-9% return per annum. However, it is prudent not to get carried away by these numbers. The risk of losses is much higher in equity investments and more over in the case of all mutual funds, the fund`s historic performance is no guarantee for its future performance.
As far as the ELSS is concerned, these funds could be more volatile than normal equity funds. Due to the lock-in of three years, the fund managers have a longer term perspective and get greater room in making big sector bets. Hence, a higher volatility can be expected from these funds vis-a-vis pure equity funds. To avoid such volatility, one can chose the Systematic Investment Plans (SIP). Through SIP, one can invest a small amount every month. The biggest advantage of SIP is that one does not have to worry about the market. When the market is moving up, one is part of the upward journey. And if the market falls, one is buying stocks for less. Using an SIP, it is possible to enjoy the best of both worlds!
If you really want to reap the rewards of your tax saving investments, think beyond the lock-in period of three years. Over the long-term, returns from equities have always been greater than any other investments. So, what are you waiting for? Consult your Financial Advisor about the ELSS!
MITUL SHAH
9879586722
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