Why you should invest in tax savings mutual funds

 “ALL THINGS BUILT WITH TAX MONEY ARE BEAUTIFUL: SO WE MUST THINK OR GO MAD”                                                                                           – Catherynne M Valente

Our desire to save tax can be channeled to help us to achieve two goals with one investment: tax saving and investing for retirement.

Equity Linked Savings Schemes (ELSSs) are one such category of diversified equity mutual funds that qualify for tax exemption under Section 80C of the Income Tax Act.

Here are the key benefits of saving tax via ELSS:

  • Long Term Wealth Creation

ELSS funds can be an ideal way to generate wealth in the long run to achieve financial goals. Long-term average returns from equity funds are in the range of 11%-14% (post tax). The key is to invest long term for 3-5 years.

Amount Invested 1,50,000 1,50,000
Returns 8% 13.00%
Tax Rate - 10%
Post Tax returns 8% 11.70%
Total Years 5 5
Maturity Amount 2,20,399 2,60,830
Returns 70,399 1,10,830
  • Shortest Lock-in Period-

Tax-saving mutual funds or ELSSs have the shortest lock-in period when compared to other investment options under Section 80C. PPF has a tenor of 15 years with very limited in the interim Minimum investment tenor of all non-ELSS 80C schemes is 5 years.

  • Tax advantage – Interest paid by some 80C investments are taxed as per the income tax slab rate of the investor. However as per FY19 union budget, ELSS capital gains are tax free up to Rs.1 lakh and beyond that limit, taxes will be charged at 10%.

Things to avoid while investing in ELSS Mutual Funds

  • Don’t begin late: It is an important one, not just for ELSSs but for all tax-saving investments. It gives you enough time to do proper research about your investment. Remember, if you pick the wrong ELSS, you don’t have the option of correcting it for the next three years. Start investing early, so that you have ample time to research about where to invest and how to invest in ELSS.
  • Don’t judge schemes on short-term performance: This point hold true for all the mutual fund schemes and not just ELSS. It is not advisable to invest your money based on six-month or one-year returns given by a particular scheme. “The scheme that you are investing in should be a consistent performer for at least five years,” says Santosh S Niwate, Director, Planet F Capital Advisory.
  • Investing at the end of financial year:
    When the time to submit investment proof is near. This is a bad investment and tax-planning strategy. In such a situation, one could face cash flow related problems towards the end of the financial year. Moreover, investing towards the end of the year forces the investors to put lump sum amount in ELSS. This, in turn, creates the risk of market timing. If the equity markets are up, the investor ends up purchasing the fund’s units at higher valuations, which in turn affects his returns. One should always plan their tax related investments in advance and invest through SIP route in ELSS to get the benefit of rupee cost averaging.

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