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I am 28 and a working professional and want to invest Rs. 1 lakh in a year for tax-saving purposes. I am confused as to whether I should invest in ELSS or in National Saving Certificates (NSC). I do not need this money for next 10 years. My purpose is to save tax and maximize the returns.
There are various products eligible for availing tax benefit under Section 80 C. These range from insurance products to tax-saving fixed deposit of banks to ELSS etc. Suitability of a particular investment product will depend various factors like your risk appetite, time horizon available and fund requirement in near future.
Since the NSCs which presently offers you fixed annual interest of 6.80% for next 5 years, there is no scope for you to maximize your returns against the return of 14.91% given by ELSS as a category. And as your time horizon is around 10 years, in my opinion, Equity Linked Saving Scheme popularly known as ELSS, are a suitable product for you. ELSS Funds are basically equity funds and are thus risky for short duration but have the potentials to give you better returns as compared to NSC in the long run. The ELSS schemes have lock-in period of only 3 years but may not for sure give you better returns within 3 years of lock in. There is also probability of the value of your investment in these ELSS going below your investment cost during this lock in period of three years.
So though technically you can redeem your investment within three years but you may have to continue with the investments in ELSS beyond three years in case the market is not is good shape when your investment completes three years. If you are investing in ELSS funds or for that matter in any Equity scheme of mutual fund, you should have minimum time horizon of minimum 7 years. Since, you are young; you can afford to take high risk of equity exposure by investing in ELSS funds. But, if your time horizon is shorter than 7 years, then you should consider investing in NSC or Tax Savings Bank FD for tax savings u/s 80 C. Since not much time is available for the year but from next year I would suggest you take the route of Systematic Investment Plan (SIP) for making investments in ELSS so that your investment is spread over the year and help you avoid the volatility risk associated with equity investing.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.
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