Investing in tax planning instruments is a priority for those looking to finalize their tax planning for the financial year. Besides investing in term life insurance, Public Provident Fund and other instruments, one should also consider tax saving mutual funds.
Tax saving mutual funds is the kind of mutual funds that offer an additional benefit of tax saving as these investments are eligible for income tax benefits. These mutual funds are ELSS (Equity Linked Savings Schemes) and invest in the growth-oriented equity market.
Equity Linked Savings Schemes are typically diversified mutual fund equity schemes which come with tax breaks and has a three-year lock-in period from the date of such investment.
Comparison with other Tax Saving Instruments
There are various savings schemes which help in wealth creation such as PPF, NSC, and FD. However, the returns from these schemes are often modest or are subject to tax. This is where Equity Linked Savings Schemes stand out; they offer higher and tax-free returns. (After the introduction of capital gains tax, returns from ELSS above INR 1 lakh would be taxed at 10% without any indexation benefit) With a lock-in period of just 3 years, ELSS remains an attractive tax saving instrument.
What do you need to look for in an ELSS fund?
Make sure to perform thorough research when you’re investing in any ELSS fund. Today, all-in-one investment platforms like reliancesmartmoney.com aggregate multiple online ELSS mutual funds making it easier for you to invest with just a few clicks. You must look at the long-term performance of an ELSS fund before investing. You should also look at the investment approach of the fund manager, the expense ratio, the portfolio and volatility of the fund in the recent past.
Finding it difficult to choose a tax saving mutual fund? Reliancesmartmoney.com can help you in comparing multiple funds and shortlisting the ones of your choice for investment. Thus, a single platform becomes your one-stop shop for all your investment needs.
Benefits of Tax Saving Mutual Funds
Tax saving mutual funds offers a number of benefits for investors. Some key benefits are as follows:
Most of the tax-payers usually tend to start investing in tax savings mutual funds at the close of the financial year when it’s the time to submit investment proofs. It’s a poor tax-planning and investment strategy. In such a scenario, one might face a cash crunch. Instead, one must plan for tax-related investments in advance and invest through monthly SIPs to leverage the benefits of rupee cost averaging.
ELSS is the perfect tax saving vehicle for investors willing to stay invested in the long run, understand the volatility and are keen to ride through it. Moreover, as discussed, one must plan these investments early in the year.
If you haven’t started already, now is the right time to plan for the next financial year starting in April. The best way for investing regularly in an ELSS fund is through monthly SIPs. You just need to start one and let it run for a long duration. ELSS allows exposure to high-risk high-reward equity market and enables diversification while helping you save tax. It’s an excellent investment alternative for wealth generation in both the short term and long term with tax benefits.