Mumbai - Indians are great savers as it is deeply ingrained in our culture. Gross domestic savings of our country hovers at around 31% in recent years. Whenever one plans to save, he should not only seek preservation of his capital, but also should look at the returns on his investment.
Though there are number of financial instruments available for savings, Equity Linked Savings Schemes (ELSS) of mutual funds are most suitable for getting higher returns with greater tax savings. These instruments also have lower lock-in period as compared to other tax savings instruments.
“ELSS is a very good tax saving mutual fund as compared to other avenues as it provides better returns, higher liquidity with lesser lock-in period,” Rohit Grover, Certified Financial Planner at Mumbai-based advisory firm, MoneyFrog told ‘The Finapolis’.
ELSS mutual funds predominantly invests in equity markets. Equity as an asset class has a proven record of creating greater wealth than other financial instruments. According to available data, equities have given a post tax return of around 17% in last 10 years and 12.9% in last 20 years. This is far higher than the returns provided by other asset classes like gold, fixed deposits and real estate among others. Therefore, ELSS is the ideal instrument for an investor who seeks wealth creation over a longer timeframe. The ELSS category has garnered 13.33% return in the last three years, 19.11% in five years, and 9.46% in last 10 years.
As far as tax savings are concerned, ELSS provides equal opportunity of tax savings with lesser lock-in period. While traditional instruments like bank fixed deposits, National Savings Certificate (NSC) get tax benefits with a 5-year lock-in period, other long-term saving avenues like Public Provident Fund (PPF) has a lock-in of 15 years. In comparison to these instruments, ELSS has far lesser lock-in period of 3 years which makes it attractive over other avenues. Investment up to Rs 1.5 lakh in ELSS can save a maximum of Rs 46,350 under section 80(c) for an individual falling under 30% tax bracket.
Furthermore, ELSS provides the opportunity to save small amounts every month through SIP (Systematic Investment Plan) mode. It is very convenient for retail investors to save through SIP, which do away with the requirement of investing bulk amount upfront. To add, returns of ELSS is also tax free as compared to many other investment instruments which mostly attract TDS (Tax Deducted at Source) provisions.
Therefore, ELSS is an ideal tax savings instrument for investors who look at wealth creation over a longer period. As we approach the last quarter of this financial year, every investor should consider investing in ELSS as per his/her risk profile and return expectations.