For my Father, the best place for a vacation is Shillong. But my mother cannot stand the cold, so also my wife, even though she is from the hills. For my children, the beaches are the best. And for me, any road trip will do, wherever it may take me or end at. We all have our favourites. Our favourites are not because they are the best, but because we like them the most.
For income tax saving under Section 80C, I have a favourite, too. But like any other favourite, it is not the only instrument I rely on to save tax under Section 80C. But still, it is my favourite. And it is none other than a mutual fund product called the Equity Linked Saving Schemes (ELSS).
When choosing an investment product, requirement of the investor comes first, then the eligibility of the product. Be advised, out of all the products for saving Income Tax under section 80C, ELSS scores highest in the scale of volatility and also in terms of return. How much to put in the ELSS is a matter of choice for each individual, depending on his risk-reward analysis and also the investor’s test. Keeping the entire amount of 1.5 lakhs, or not keeping a single dime are both bad ideas, both for a novice and for an expert.
One of the biggest advantages of an ELSS fund is a shorter investment period. Unlike bank Fix Deposits or National Saving Certificate (NSC), which are for five years or PPF, which is for 15 years, the ELSS’s lock-in duration is only three years. An investor can redeem his investment after three years, which is not possible in any other traditional or equity-exposed products, including Equity Linked Insurance Policy, popularly known as ULIP. This makes ELSS the best product in the equity category for saving taxes. No doubt, lakhs of young, salaried individuals’ first involvement in equity is usually through an ELSS.
Also, for a fund manager to manage an ELSS fund is much easier than a normal open-ended equity fund. Although structurally, there is no difference between an open-ended equity mutual fund and an ELSS, but since in ELSS the investment is locked for three years, fund managers can take long-term investment calls with ease. Often it has been observed that many times ELSS beats a normal equity fund, much to the amusementand delight of investors.
Another advantage of ELSS is that, all interests from it are tax-free, just like PPF. Suppose, after investing one lakh rupees, you gained Rs. 60,000 after three years, no income tax will be levied on that amount. Same will not be true in bank FD or NSC. That’s because any investment in equity of more than one year attracts no tax under the current income tax rules of India.
But sadly, a lot of people lose out on this great product for a number of reasons. Primary among them is that - most of us, especially the people from North-East India, don’t think about investments until the month of March. Then comes the intense pressure from the sales team, both from your bank and also from your friendly family agent. And needless to say, investing in an equity product at one go is the worst investment decision one can make. The proper route to invest in an ELSS is through a systematic investment plan, contributing a regular amount from your bank each month. In case you have missed out, don’t worry, but also don’t hurry. Start a new SIP from this year and continue it up until next year, and year after year.
With interest rates going south, I will encourage even senior citizens to put a portion of their investment in ELSS if they have tax liabilities. But again, be advised, a person of considerable age should not put more than 30 per cent of his investment in equity at any given time.
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