Tax-saver mutual funds are just like any other regular mutual funds with an added benefit of tax-saving incentive. The special feature of such funds is that these funds are eligible for tax benefits under s/c 80C of the Income Tax Act, 1961.One such fund is Equity Linked Savings Scheme or also known as ELSS. ELSS funds are the only type of mutual funds that are eligible for tax deductions.
Why ELSS is one of the best tax saving investments?
- Significantly higher returns
Since ELSS invests the majority of its corpus in equity related securities, the returns are significantly higher than other form of 80C investment option. ELSS mutual funds are known to provide astounding returns around 12-14% when invested for a longer duration.
- Shortest lock-in period
Mutual fund tax-saver– ELSS enjoy the shortest lock-in tenure of just 3 years. Contrary to other tax-saving investments such as Public Provident Fund (PPF), Unit-Linked Insurance Plan (ULIP). Employee Provident Fund(EPF) and life insurance which have a minimum lock-in period of 5 years, ELSS is a better option.
- Protection against market volatility
ELSS funds are often the primary point of engagement for investors looking to invest in equity related investments. These tax-saving mutual funds act as strong shield to withstandvolatility accompanied with investing in stock markets.
- Flexibility with ELSS
If you are not satisfied with your ELSS fund, then you can shift to another fund of your choice, as you are not required to stick to a multi-year deal. However, in case of a ULIP, you can only invest in funds offered by that ULIP. Thus, these tax-saving mutual funds offer great flexibility as opposed to ULIP.
- Lowest expense ratio
A scheme with lower expense ratio is considered as a cost effective scheme. A lower expense ratio means higher take-home income. ELSS funds enjoy the lowest expense ratio against all other 80C investments.
ELSS vs Other 80C investments
| BASIS OF COMPARISION | ELSS | ULIP | PPF | EPF | LIFE INSURANCE |
| Definition | ELSS is a tax-saving mutual fund where investments are made in equity or equity-related securities. | ULIP is an investment plus insurance product where a part of the investment is used for securing the investor’s life, while the other part is invested in preferred financial products. | A PPF is a savings scheme offered by the government of India where in the interest is paid by the government. This is considered as the safest tax-saving investment option offered to investors. | EPF acts as a saving tool for the employees. The employee as well the employer contribute an equal amount towards savings that can be redeemed upon retirement. | Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment to the named beneficiaries upon the death of the insured. |
| Expected returns | 15-18% | 8%-8.5% | 8-9% | 6-8% | |
| Tax benefits | Tax deduction of up to Rs1.5-lakh per annum under Section 80C.LTCG gains taxes at 10% above Rs1 Lakh without the indexation benefit. | The invested amount offers tax deduction of up to Rs1.5 Lakhs u/s 80C. However, the gains are taxable. | Money deposited in a PPF account u/s 80Ccan receive benefits up to Rs1.5 Lakh. Interest gained is tax-free. | Invested amount offers tax benefitsup to Rs1.5 Lakhs under Section 80C | The invested amount offers tax deduction u/s 80C and 10(10D) |
| Liquidity | High-liquidity at all times after the lock-in period. | Funds can be available after the lock-in tenure subject to further policy conditions. | Low or partial withdrawals after the expiry of 7 years from the account opening year. | Investor can withdraw 75% of their EPF corpus if they have been unemployed for more than 1 month. | It has a low liquidity ratio |
| Lock-in period | 3 years | 5 years | 15 years | Only an investor with an income of Rs15000 pm or less is mandated to contribute in EPF | 5 years |
| Minimum investment amount | Rs500 | ₹1,00,000 (for plans 45 years and below) | Rs500 | 12% of wages | No minimum amount |
Whether you decide to invest in ELSS or not, solely depends on your financial goals, investment horizon, risk appetite, and market conditions. Always consider these factors before zeroing out on your preferred mode of investments. Happy investing!
