Tax-saving mutual funds, over the years, have proven to be the best tax-saving option for investors. While there are various tax-saving investment options such as National Pension System (NPS), National Savings Certificate (NSC), and Public Provident Fund (PPF), among others, Equity-Linked Savings Scheme (ELSS) has remained the most preferred. Here are 5 reasons why you should consider investing in tax-saving mutual funds (ELSS):
1. Lowest Lock-in Period
Conventional tax-saving instruments generally come with long lock-in periods. While PPF has a lock-in period of 15 years, the Employee Provident Fund (EPF) and NPS require individuals to stay invested until retirement. On the same line, tax-saving fixed deposits also have a lock-in period of at least 5 years.
When compared to all the traditional investment options, ELSS funds have the lowest lock-in period of 3 years. You can either choose to stay invested or redeem your invested amount post the lock-in period.
2. Systematic Investment Plan (SIP)
Systematic Investment Plan (SIP) is a disciplined way of investing a fixed amount at regular intervals in mutual funds. SIP is the most viable option available for investors who do not have a lump sum amount to spend. SIPs allow you to invest a small amount monthly and avail the same tax deductions under Section 80C as that of a lump sum investment.
Also, SIPs offer the benefit of rupee cost averaging. This means you won’t have to control the risk concerning the market ebbs and flows.
3. Inflation-beating Returns
Unlike fixed-income tax-saving investments, ELSS funds primarily invest in equity and equity-oriented instruments. Also, equity is the only asset class that can generate comparatively higher returns than that of the prevailing inflation rates. Hence, investing in ELSS over a long period will not only generate superior returns but also give you tax benefits under Section 80C.
Watch: How To Withdraw PF Online
4. No Maturity Date
One of the significant advantages of investing in ELSS funds is that they don't have a maturity date. You can choose to stay invested in the fund even after the lock-in period has expired. Being invested in ELSS funds for a long-term unleashes the power of compounding on your investments. The longer you stay invested in the scheme, the higher the returns it generates. You can also terminate the investment if you don't want to remain invested anymore after the lock-in period.
5. Portfolio Diversification
Investing in tax-saving mutual funds gives the benefit of diversifying your portfolio as per requirement. With tax-saving mutual funds (ELSS) mainly linked to the equity market, the funds are invested in stocks of various companies from various sectors. You also have the option to invest your money in more than one ELSS fund. Also, you can stop investing in an underperforming fund and switch to another fund at any point in time.
Apart from these advantages, ELSS also offers best post-tax returns among its peers. In ELSS, the long-term capital gains (LTCG) of more than Rs 1 lakh are taxed at 10%. However, when compared to other conventional tax-saving instruments like NSC, FDs and PPF, ELSS is still a better option in the long run. Though tax-saving mutual funds (ELSS) come with a wide range of benefits, investors must consider their financial goals, time horizon and risk appetite before investing.
(The author is Founder and CEO, ClearTax)
(Disclaimer: These are the views of the author. Please consult your financial advisor before investing in any product)