Looking at mutual funds beyond tax savings
Usually, tax saving instruments come with low returns because that’s the price you pay for saving some extra money. But there is one instrument that makes money for you and at the same time, helps you save taxes. Called equity-linked saving schemes (ELSS) or tax-saving mutual fund schemes, these are equity funds that invest their entire corpus in buying shares of companies listed on stock exchanges. But they come with a three-year lock-in. You cannot, under any circumstances, withdraw your money before you complete three years, unless the primary unitholder passes away.
Since an ELSS is a mutual fund scheme, returns are not guaranteed as rules prohibit mutual funds from assuring returns. But like in the case equities, the longer you stay invested, the lower the chances of making a loss.
According to figures compiled by Value Research, a systematic investment plan in tax-savings funds, made five years back, would have returned 18% in the past five years and 13% in the past three years. We usually invest in ELSS or any other tax– saving instruments towards the end of the financial year. A good way to overcome this lethargy and also quite possibly the deadline, is to start a SIP. All mutual funds have the SIP facility. Here, you invest a fixed sum of money in a scheme of your choice and money automatically moves from your bank account to your mutual fund scheme. So you don’t need to remember to invest by the time tax-filing season comes upon us.
“If you are a first-time equity investor, then it’s advisable to split your amount between an ELSS and a good fixed-return yielding product like Public Provident Fund. But if you already have enough fixed-return yielding instruments in your portfolio and have invested in equity funds, allocate more money out of your annual tax-planning corpus to an ELSS”, says Amol Joshi, founder, PlanRupee Investment Services.
While opting for the SIP option, you have a choice to either opt for a perpetual SIP (with no end date; the SIP just goes on till the time you write to your fund to stop) or you could specify an “end date” when your SIP would stop. A preferable option is to have a 1-2 years option in an SIP so that if your fund goes off the rails, you can stop putting in fresh money. Each instalment made through SIP is subject to the three-year lock-in.
Make sure you stick to just one- maximum two- ELSSs in your portfolio.