Achieve Long Term Financial Goals with Tax Saving Mutual Funds

(Article dated 28^th Jan)

The investment market is swamped with a wide range of financial products. These schemes usually have a varied investment objective catering to almost every type of investor and their investment need. Depending on a person’s financial goals, he or she should narrow down to an amount and investment tool. ELSS invest predominantly in equity and equity related instruments, making them one of the most talked about investment tools among both new and seasoned investors. Investors seeking to give their investment portfolio a slightly aggressive approach can consider investing in mutual funds.

If you are new to investing, mutual funds investments can give you a head start. Sometimes, investments made in direct equities may expose an investor’s finances to higher risk. However, in mutual funds, a diversified portfolio is usually maintained, which helps in balancing risk. So investors with moderately high risk appetite and keenness to witness their money grow can consider investing in mutual funds. If you are someone looking for a mutual fund scheme that not only gives you a chance to grow but also gives you tax benefits, you might want to consider investing in Equity Linked Saving Scheme.

What is Equity Linked Saving Scheme?

As per SEBI definition, ELSS is “An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit”. ELSS not only holds the potential to offer investors some capital appreciation but also comes to rescue of investors by bringing down their gross taxable income. That’s because ELSS is the only mutual fund scheme which has tax benefits.

Under Section 80C of the Indian Income Tax Act, 1961, there are several tax saving instruments, where investors, depending on their investment objective, risk appetite and investment horizon, may choose to invest and claim annual tax deductions of up to Rs. 1.5 lakhs. Investors, as per their needs, can invest and claim deduction up to Rs. 1,50,000* annually by investing in ELSS funds and claim tax deductions to reduce their tax liability. ELSS comes with a mandatory lock-in of three years, which means ELSS investees need to hold on to their investments for a minimum period of three years.

ELSS, as the name suggests, is an equity related investment scheme. Thus, investors should bear in mind that investments made in the equity market are subject to market risks and returns are never guaranteed. But this doesn’t necessarily replicate into investors incurring confirmed losses. So, if you want to save taxes and, at the same time, have a moderately high risk appetite in order to invest in equity markets that have the potential to try and fetch some capital appreciation through equity investment, you may invest in ELSS.

Let us take an example to understand how a tax saving mutual fund like ELSS can help you save taxes:

Rajeshwari Pandian is a senior instructional designer with a taxable income worth Rs. 12 lakh a year. That lands Rajeshwari in the 30% tax bracket. Rajeshwari learns about ELSS and decides to invest a total amount of Rs. 1.5 lakh. As per 80C of the Indian income tax act, Rajeshwari’s gross taxable income has now been reduced to Rs. 10.5 lakh as she can claim deductions worth 1.5 lakh rupees through her ELSS investments.

According to Section 80C, you can subtract the sum you invested in an ELSS from your annual income to decrease your overall taxable income hence, saving taxes. What many investors fail to realize that though ELSS is primarily a tax saving scheme, it is a decent investment too as well. If an individual plans to stay invested longer, they may gain some returns from ELSS.

How can a tax saving mutual fund like ELSS help in achieving long term financial goals?

ELSS, being a mutual fund scheme, invests a minimum of 80 per cent in equity and related instruments of the total assets. Investment held in equity over the long term can help investors achieve long term goals like retirement planning, buying a weekend home or planning your children’s education and future. Every investor has a different investment goal, and investors with a long term investment horizon have an opportunity to achieve these goals through investing in a tax saving mutual fund like ELSS.

Investors can start investing in ELSS with an amount as small as Rs. 500 per month. Investors can give their ELSS investments this systematic approach by opting for a Systematic Investment Plan or SIP. SIP is easy and hassle free investment process where, as per investor’s instructions, a certain fixed amount is debited from his/her bank account on a predetermined date of every month and transferred towards his/her ELSS investment. Gradually, investors can increase their SIP amount, and if they continue to invest regularly in a systematic and disciplined manner, ELSS might help them achieve their long term financial goals.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.