With HRs and accounts department sending the “submit your tax investment proofs” email, thousands of taxpayers are frantically searching for the best way to save some tax, whatever way they can.
Inevitably, some less than great decisions will be taken. Thanks to investor education programs, most individuals are now aware that insurance should be bought for actual insurance needs rather than just as a way to save tax. Most individuals would end up with a list of options that includes Public Provident Fund (PPF) or a 5-year Fixed Deposit (FD) or Equity Linked Saving Scheme (ELSS) tax saving mutual funds.
These are among the most popular options available and a PPF account or an FD can be started using your existing bank account. They have been the default option for decades. Though this is not necessarily smart.
ELSS tax saving mutual funds have been getting some good traction in the past few years as individuals are becoming more aware. Considering the fact that ELSS funds invest in equity, they also promise the most in terms of growth. Equity, however, is a volatile asset class due to its market dependent nature, but this is exactly what makes it grow ahead of inflation unlike fixed income-based asset classes like FDs. This volatility might be a turn-off for most new investors as they don’t want to deal with uncertainty but they also miss out on the potential for growth.
Here’s how your money will grow in ELSS (first row) tax saving mutual funds versus PPF (second row) or FD (third row) assuming a total investment of Rs 4.8 lakh in each of them:
As you can see the growth potential is the highest in tax saving mutual funds, despite the inherent volatility. This makes ELSS not only attractive as a way to save tax but also a great way to start with equity for most investors and grow their wealth over the years.
But here are three benefits of ELSS funds you should consider.
The obvious benefits - lowest lock-in, best potential returnsUnlike any other investment option, tax saving mutual funds allow for the shortest lock-in period of three years. Not just that, these special mutual funds offer the biggest bang for the buck because they invest in equity and thus have the highest potential for growth. Historically, equity has delivered 12-14% annualised returns as compared to 6.5% for fixed deposits. PPF has a lock-in period of about 15 years and currently returns slightly over 8% (pre-tax) annualised while tax-saving FDs have a lock-in of 5 years and return anywhere between 6%-7% pre-tax.
The greater long-term benefit - Learning about equityWhat smart investors realise is that tax saving mutual funds are an easy yet intelligent way to get started with equity mutual funds. Since you anyway have to make tax-saving investments, why not start with something that will form the basis of your future wealth? You will experience the market volatility without being able to do anything about it given the lock in.
You can make your investments in monthly instalments - like an EMIYou don’t have to shell out the entire investment amount in one shot. You can do it over a few months using a SIP. Best to start in April itself, but even if you get started in December, you can split it over 4 months - December to March.
Getting started with tax saving mutual funds is quite easy with online services, many help also select the best tax saving funds for you. You also get a tax-saving investment proof which you can submit to your HR when the time comes.
(Ashok Kumar ER is co-founder of Scripbox, a Bengaluru based startup)
