Which Tax Saving Fund You Should be Investing in?


It you want to get rid of your tax woes and start the new fiscal year tension free, start investing right from the beginning in a feasible tax saving instrument. The Indian investor now has the option of saving tax and earning long term capital appreciation at the same time by investing in Equity Linked Savings Scheme (ELSS). ELSS is an open ended tax saving scheme that comes with a mandatory lock-in period of three years and tax benefit. This means that investors cannot redeem their ELSS fund units for a minimum period of 36 months from the date of investment. Having said that, the three year lock-in is probably the shortest as other tax savings instruments come with lock-in periods that can range from anywhere between 5 to 15 years (more in case of others).

What should I choose ELSS for saving tax?

If you are new to investing or mutual funds then you must understand that when you are investing in a tax saving scheme, your investment objective must not be just saving tax but should also be generating some returns at the end of the investment tenure. ELSS holds the potential to help you generate some exceptional returns over the course of three years.

Here are some of the reasons you should consider investing in ELSS fund –

ELSS in an equity oriented scheme

Equity oriented schemes might be prone to market volatility over the short term, but in the long run they have always given better returns as compared to traditional tax saving instruments. Since ELSS predominantly invests in large and select mid cap stocks, this fund might be ideal for anyone who wishes to earn long term capital appreciation over the long term. However, equity schemes carry a high risk profile and hence investors are expected to determine their appetite for risk before investing in ELSS scheme.

ELSS has the option of SIP investment

For those who are new to mutual fund investing, SIP or Systematic Investment Plan is an easy and hassle free approach where investors can invest small amounts at fixed intervals. With SIP, you can invest in ELSS funds with an amount as low as Rs. 500 per month. All an investor has to do is complete all the one time formalities with their bank and the fund house and decide how much they want to invest. After this, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to ELSS fund. Investors can also refer to SIP calculator, a free online tool to help them get a rough estimate on the capital gains they might earn at the end of their three year investment period.

ELSS is a professionally managed fund

ELSS is managed by a team of professionally managed fund managers who are responsible for helping the ELSS fund outperform its underlying benchmark. Since this is an active managed fund, ELSS investors receive active risk management of their portfolio. It is the duty of the fund manager to buy / sell securities in quantum with the investment objective and the asset allocation strategy of the scheme. Since, this a professionally managed fund, novice investors without prior investing knowledge too can consider investing in ELSS fund.

If you haven’t yet invested in a tax saving scheme, then you can consider diversifying your investment portfolio with ELSS scheme. However, since this is an equity oriented scheme investors are expected to understand the risks associated with ELSS investors.

If you are entirely new and do not understand how ELSS funds work, please talk to your financial advisor before investing.

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