Here's Why You Should Invest in Tax Saving Mutual Funds

19 Feb 2021|

2 min read |

by ICICI Securities Team

There are several financial instruments which not only allow you to save tax but also get fairly decent returns on your investment. These include Public Provident Fund, Postal Savings Schemes like NSC (National Savings Certificate), tax saving FDs, National Pension Scheme, etc. While, most of these investment instruments are largely considered as extremely secure, they require you to stay invested for periods of five to fifteen years. In comparison, ELSS funds are tax-saving mutual funds, that provide more or less the same tax benefits as the aforementioned instruments, but can offer better returns. Here’s why you should invest in tax-saving mutual funds like ELSS.

Shorter Lock in Period

Equity Linked Saving Scheme,or ELSS, has a lock in of just three years, but gives you better returns than most of these other instruments, because a large chunk of the fund is invested in equity. However, you must keep in mind that equity carries greater risk than the other instruments because they are market linked. Despite its short lock-in period, ELSS like NPS, PPF, etc, falls under Section 80C, which means you can invest 150,000 per annum and gain tax benefits.

Other benefits:

Apart from the shortest lock in period, ELSS allows you to earn regular dividend pay-outs. Moreover, you can either invest a lump sum, or through a systematic investment plan (SIP) which can be as low as Rs 500 per month, without an entry or exit load. Investing via SIP enables you to gain benefits like Rupee cost averaging and the power of compounding, wherein your profits are reinvested. If you opt for the SIP, remember that each instalment is treated as a separate investment and will be locked for three years from the date of investment. There is no maximum limit on investments, although you can claim deductions up to a maximum of Rs 1.5 Lakh per financial year.

Tax implications:

As for taxes on returns, ELSS is subject to long term capital gains tax, while NSC is subject to basic income tax. Also, NPS is partially taxable, while PPF is a completely tax-free investment instrument with no taxes levied on the investment amount, interest earned and maturity amount. However, ELSS can deliver considerably higher returns in a shorter investment tenure, as compared to all other tax-saving instruments. It is particularly suitable for people who want to save tax while getting above average returns in the long term.

Other options:

In a nutshell, tax saving mutual funds give you the benefit of tax deductions and above average returns in the longer term. Which is why any investments you make in equity should be for a longer term, so that you skip the short-term volatility. However, there is still a risk involved because it is market linked, and those who do not have an appetite for risk should stick to traditional instruments such as government bonds, Bank FDs, PPF etc which give you slightly less but with secured returns.

If you are new to the market and unfamiliar with the process, You can get in touch with us now to understand the process of investing in ELSS!

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