If you are a hard-working, hard-earning individual, chances are that you are going to have to invest some time in tax planning for the next financial year.
The question that is probably foremost in your mind is how to save as much as possible on the amount of tax you will have to shell out.
As you know, irrespective of the income, the maximum deductions that can be made from your taxable income are up to Rs 1 lakh (Rs 100,000).
While the Public Provident Fund and National Savings Certificates are the traditional way to go, you might want to consider investing in ELSS, or Equity Linked Saving Schemes.
Firstly, what is Mutual fund?
Mutual Funds are among the hottest favourites with all types of investors. Investing in mutual funds ranks among one of the preferred ways of creating wealth over the long term. In fact, mutual funds represent the hands-off approach to entering the equity market. There are a wide variety of mutual funds that are viable investment avenues to meet a wide variety of financial goals.
What are Mutual Funds ?
A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities — ranging from shares and debentures to money market instruments or in a mixture of equity and debt, depending upon the objectives of the scheme.
Why choose Mutual Funds ?
Investing in Mutual Funds offers several benefits:
* Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets
* Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.
* Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.
* Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.
* Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund manager’s investment strategy.
* Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience.
* SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.
What are Equity-Linked Saving Schemes?
These are mutual funds that invest in the stock market and give the tax benefit under Section 80C of the Income Tax Act.
How this works is that the fund manager will invest in shares of various companies across various industries. So, in fact, it is a normal equity diversified fund. But there is the added tax benefit which a normal diversified equity fund will not have.
This sets it apart. And currently, if you invest in such funds, you get a rebate. This is the immediate plus of the ELSS mutual fund.
What makes ELSS a better option than other saving instruments?
The answer is really very simple. When you invest in ELSS mutual funds, you not only save the amount permissible by the government, you also stand to gain from it, because of the high rate of return.
There are, of course, many reasons why you should go the ELSS way.
The returns are really very good — the year ending 2005 saw ELSS as the best performing in the mutual fund category, showing returns of nearly 60%. In fact, a number of funds have appreciated by more than 80% in their three-year period.
However, though in the past few years things have not been so good due to the economic downturn and recession effects, remember equities are long term investments that yield better in the long run (a span of 10-12 years).
These funds have a lock-in period of three years, which prevents you from unnecessary withdrawals and spending and helps earn a return over time. However, remember to stay invested for longer periods of time to the tune of 10-12 years to reap the best of returns.
Also, the lock in gives fund managers the freedom to take sector and stock bets, which they are not able to do in the regular equity schemes.
The dividends you earn will be tax free.
When you sell the units of these funds, you can avail of the long-term capital gain for which there is no tax. If you sell after one year, you pay no tax.
Points to consider before you invest
Unlike the Public Provident Fund or the National Savings Certificate, the returns here are not guaranteed. While there is a chance at earning handsome returns, the likelihood of incurring losses is also high.
Also, unlike PPF and NSC where investing at one go does not have any impact on the investment, lump-sum investing in an equity fund could be dangerous.
It is always wise to have some amount of equity in your portfolio. If you are not too sure about directly getting into the stock market, a mutual fund is your best bet.
Remember that the younger you are, the greater the amounts you can think of investing in these schemes. As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. But it is always wise to have some amount of equity in your portfolio.
And if you are not too sure about directly getting into the stock market, a mutual fund is your best bet. Decide how much you want to invest in an ELSS and start investing a fixed amount right away every month, and watch your nest egg grow.
