Major benefits of tax saving mutual funds

Tax planning is one of the most hassling activities for any individual who is an earning citizen of a country. If an appropriate plan is not made for the allotment of funds and probable capital gains, then it can lead to a very negative impact on the person’s finances. This process includes a careful assessment of all the sources of income and points of expenditure, probable investments, returns earned on those investments, etc.

Most people make investments as to set-up a means of increasing their earnings. These investments can range from instruments of the capital market, bonds, mutual funds, government schemes among many other readily available investment instruments.

A prevalent practice that is gaining popularity nowadays is that people have started investing in investment plans which help save tax or get tax-free returns. This helps the investor in getting the maximum financial benefit out of his investment.

Then most popular sources of tax-free income generation are-

• Public Provident Fund
• National Saving Schemes
• Life Insurance
• Health insurance
• Equity Linked Saving Schemes
• Bank Fixed Deposits
• Pension Schemes

All of the above-mentioned options for investment provide a tax benefit of varying amounts.

Out of the given list, equity-linked saving schemes have gained a lot of popularity among probable investors because of its various features and benefits.

ELSS is a type of mutual funds investment that offers the investor lucrative tax benefits along with a good return on investment.

To understand ELSS a little better, it is very important to understand the significance of mutual funds. Mutual funds are investment options for investors who wish to balance the risk and returns of their investment. The amount invested in a mutual fund is further allocated to trade in securities by professionals. More features of mutual funds can be ascertained from the following information.

• Mutual funds were introduced in India as an investment instrument in the year 1963 and are regulated by the Securities and Exchange Board of India.
• There are multiple types of mutual funds available depending on the tenure, risk-bearing capacity, principal amount, expected returns and an expected tax benefit.
• Funds invested in mutual funds are allocated by money managers, who have expertise in investing in diverse securities in the security exchange market. This reduces the risk by leaps and bounds.

Equity Linked Savings Scheme (ELSS)-

It is a tax saving investment scheme for individuals who wish to invest in mutual funds with an opportunity of multiplying the investment. The investor has an option to pay the invested sum in a lump-sum amount or through the means of a systematic investment plan (SIP). In SIP, the investor has the ease of paying the invested sum in fixed installments over the tenure of the plan. This makes it hassle-free and economical for the investor.

ELSS is the most favored mutual fund investment instrument available in the capital market at present. The various features of ELSS are-

• The profits earned on investments done in ELSS are completely tax-free.
• The lock-in tenure for ELSS investments is of minimum 3 years from the date of investment.

Benefits of investing in ELSS through SIP-

• The investor has an option of finding the most appropriate investment plan by investing in a systematic investment plan which allows him to invest as low as INR 100 per month. A SIP calculator, which is readily available online, allows an interested investor to find the most appropriate amount, plan tenure, and expected returns, for various mutual fund investment instruments.
• They provide an option of liquidity after 3 years. This is the shortest tenure available for a good return-reaping investment.
• ELSS enables the investor to invest in the volatile capital market and stand a chance of earning a good return on investment. The fact that the investor has the support of experienced fund managers in handling their equity investments reducing the risk of mismanagement.
• It has better credibility and flexibility than PPF as the maturity period is marginally less and the rate of return, at present, is 43.48% over one year and 22.99% over a period of 3 years. This is higher than the average 8-9% offered by most fixed income schemes such as provident funds, saving certificates, government schemes, bonds etc.
• The investor has the option of holding his investment even after the date of maturity. He has the choice to select the tenure of his investment. However, it must be held for at least 3 years. This allows the investor to have the option of liquidating his investment in the time of need without paying a fee or premium.

Thus, it can be inferred that the rate of return earned by an investment in ELSS through SIP is higher and tax-free and has marginally lesser risks. Also, the maturity period is shorter than most investment options, making it a more favored and popular investment option.

For the sake of reaping maximum benefits out of this type of investment, it should be started well-in-advance. While choosing the appropriate ELSS, more trust should be placed on providers who have consistent growth patterns and not random fluctuations in their financial charts.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.