The last budget hike in deduction limit under section 80C means that taxpayers have more room to save their money by up to Rs50,000, thanks to our finance ministry for enhancing the overall limit under Section 80C from Rs 1 lakh to 1.50 lakh per annum. The Government gives an opportunity to all tax payers to invest more and reduce their tax by maximum up to Rs 15,450. So, every tax payer should take the advantage for these changes while choosing the right avenue to invest the same so that your money can grow to beat the inflation and save tax also. None of among other tax saving schemes such as NSC, PPF Insurance, and five year fixed deposits etc. that have a fixed maturity do not give high returns with lower liquidity. Undoubtedly, in liquidity angle: Tax saving mutual funds or ELSS is definitely beneficial as compared to other tax-savings instruments, as the lock- in period is just away three years as compared to the maturity period of five years (NSC), 15 years (PPF) and five years (ULIPS) respectively. Also the earning potential of ELSS is high, although at higher risk.

Grow

Why Choose ELSS?

There are many compelling reasons why ELSS funds should be part of the every tax payer’s investment portfolio. Like diversified equity mutual fund schemes, ELSS that also invests over 65% in equity related instruments which makes ensure to give high return in the long-run. These schemes would help you to grow your money in the pace of inflation and sufficient to meet any long-term financial goals. Investing in ELSS mutual funds, you are eligible for tax exemption up to Rs 1.50 Lakh u/s 80C. If you have not utilized 80C fully, this is a good opportunity for all tax payers to invest in ELSS funds to exhausts the limit. Moreover, its return or gain is tax free; none of the returns from tax saving investment options other than PPF are tax free. NSC, Tax Saving Bank FD, Tax saving Post office TD scheme etc. all these tax saving option returns are taxable based on individual tax slab.

Choose Growth Option

While investing in any mutual fund scheme, you need to choose the single option among growth, dividend payout and dividend reinvestment options. Those who have opted for dividend option may have heard of dividend are announced out of the realized gains by the scheme time to time. But under the dividend option, you have two sub-options: first, you have to opt for a payout of the dividend, or in the second it can be reinvested into the scheme. If you have opted for the dividend reinvest option under an equity-linked saving scheme (ELSS), any dividend declared by scheme will also automatically get locked for further three years resulting in double whammy, one could not get tax benefit under section 80C for dividend reinvestment, though it gets locked for further three years: the other, this process may go on for an infinite duration. However, investor is free to alter the dividend reinvestment option after the lock-in period gets over. For that, one needs to submit a written application for fund house subject to KYC compliance. Therefore, while choosing the option, an investor should prima facie choose growth option, where the scheme does not pay any dividend, but continues to grow. Whatever gains are made by selling any fund holdings are ploughed back into the same scheme. This gain is reflected in the net asset value (NAV) of the scheme, which rises over time and creates respectable corpus.

How you should you invest?

Your risk appetite should at all times determine the total investment in tax saving funds. Don’t go overboard in the segment simply because of the opportunities to rake in impressive return thereby ignoring the risk involved. Unlike a tax-saving fixed deposit or a traditional insurance policy, where you have to shell out the entire money as a lump sum, but ELSS requires a different approach. Being an equity investment, it is exposed to market risks and its performance depends to a large extent on the points of entry and exit. When you are investing a lump sum in the scheme, the timing of entry will have a bearing on the returns. If you invest when the market is at a peak, you could end up with erosion of capital. The loss could even offset any tax saving you achieved at the time of making the investment. Even if you spread your investment over the last three months of a financial year, it will not reduce the risk greatly. The Systematic Investment Plan (SIP) is an effective way of investing in ELSS as the concept of rupee cost averaging and the power of compounding work well. While using this route in tax savings funds, not only does it do away with the need for timing markets, but it also reduces the strain on your wallet at the end of financial year when most investors conduct their tax planning exercise.

How to redeem ELSS SIPs

Although, the lock-in period is the shortest, three years as compared to other tax saving instruments, the word of caution is here that while using SIP route each SIP either monthly or quarterly automatically gets locked for three years from the date of the respective investment. It implies that after three years, you will not be able to get withdrawal of the full amount invested through SIP. So, your redemption would be on a first-in first-out basis since the units allotted first will be redeemed first. Investors can benefit by using systematic investment strategies, such as a systematic transfer plan (STP) to withdraw from the ELSS fund and invest in other funds of their choice.

This article got published in Dainik Bhaskar on 26-05-2015 in Hindi Version, please click here

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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