Earlier, we looked at the pros and cons of . tax-saving fixed deposits Another popular tax-saving alternative under Section 80C is mutual_funds. These tax-saving mutual funds are known as Equity Linked Savings Schemes (ELSS). ELSS funds are widely-used to save taxes but a lot of people make rushed investments in them in the last financial quarter of the month. To get the best out of tax-saving mutual funds, an investor needs to understand their pros and cons
ELSS and PPF are two completely different products. The reason one tends to compare is because the two are part of the same tax saving section of the income tax act.
PPF is similar to debt instruments. Returns from this investment is fixed and more importantly similar to the underlying inflation in the economy.
Its far better to invest in ELSS than in PPF or any other tax saving funds.
Here are the pros of ELSS -
Investments are in equity -
It gives you higher returns and way to participate in the growth story of India. Unless you have a lot of time to research and pick stocks, this is the best way to invest.
Shortest lock-in of 3 years -
If the market shot up in these three years, you can withdraw the money and invest elsewhere - buying a house etc. If the markets have not performed so well during these three years, you can wait and hold longer. Unlike FD, the investments are not liquidated by itself
The returns are tax free -
similar to PPF, the returns earned on the ELSS investments are subject to nil taxation.
It’s easy to invest, track and redeem -
with just click of buttons or touch of screens, you can invest and manage your investments. The returns are updated on a daily basis and after three years, you can withdraw whatever amount you need, keep the rest of the investments invested.
While ELSS are logically best options, here are a few factors why someone might shy away from investing in them for saving taxes -
No fixed returns - certain people want certainty, guarantee. ELSS can’t offer that as the investments are linked to market. But PPF guarantees you a 8% returns.
If I can, then I will redeem -
Since ELSS has a lock-in for just 3 years, you might use the funds just after that. Therefore, your impulse shopping or urge to spend can hurt your net worth. While in case of PPF its locked for 15 years.
Want to save money through ELSS?
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