Tax saving funds as a category delivered compounded annual growth of 11.2% over the past five years.
Tax savings funds, technically known as equity linked saving schemes (ELSS), have emerged as a preferred choice of investors to plan their taxes. High double-digit returns by these funds over long term and relatively less attractive performance by other options make investors consider investing in ELSS. Here is why you should start investing in tax saving schemes now
High return potential
Tax saving funds as a category delivered compounded annual growth of 11.2 percent over five years. No wonder there are many investors flocking to invest in tax saving funds. As on April 30, 2018, tax saving funds have Rs 85,804 crore invested as per the latest data released by Association of Mutual Funds in India. The same number stood at Rs 63,799 crore a year ago.
“Relatively better performance numbers in comparison with conservative tax saving options such PPF, bank fixed deposits make ELSS a better option. If you are looking for double-digit returns over long term along with tax benefits under section 80C of Income Tax Act, you should consider investing in tax saving funds,” says Joydeep Sen, founder of wiseinvestor.in.
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Avoid last minute rush
Procrastination makes many individuals invest towards the end of month of March. If you decide to invest now it saves you from the mistakes you would otherwise commit when you are investing in a hurry. For example, many individuals end up cutting a cheque of Rs 1.5 lakh towards the end of the year, whereas they need to invest much less. If one has paid life insurance premium, provident fund contributions and such other eligible payments his need to invest under section 80C is reduced to that extent.
If you decide to invest now, you have time to take stock of your needs and other commitments, this will save you from committing mistakes such as over-investing.
You can SIP
Investing at the last minute brings in all the troubles associated with ‘liquidity crunch’. Some are forced to borrow. Some have to cut corners. Instead if you decide to start investing now, you have time on hand. You can invest a fixed sum of money each month. Systematic investment plan over next six months will ensure that the money is invested without a pinch. “You have time on hand now. You can avoid timing risk by enrolling for a systematic investment plan,” says G Pradeepkumar, CEO of Union Mutual Fund.
Pick the right scheme
As you are investing this money for long term with a view to earn handsome gains, you have to take some efforts in terms of choosing a scheme that suits your risk profile. Do check the past performance, though the past performance need not be repeated. You should check the portfolio composition and investment strategy of the fund manager before committing your money.
If you decide to invest your money now, you have adequate time on hand to do some homework.
Benefit from volatility
As the macro scenario worsens, the Indian stocks are under pressure. Be it rising crude oil or the falling rupee, the Indian stocks are expected to slide down. This could be a great time to buy equities and equity mutual funds. As tax saving funds invest minimum 80% of the money in stocks, this could be an opportunity you may want to tap into.
“If you are worried about the ongoing correction in the stock market, you may also want to invest some of your money in tax saving funds and some money in traditional options such as PPF to ensure peace of mind,” advises Joydeep Sen. “Though these schemes come with a three year lock in, you need not sell after three years. You would be better off taking a long term view of more than five years as it lets your money compound.”