Tax Saving Mutual Funds (or ELSS): Grab them with both hands before they go away
One of the best tax saving instruments available today might not be available 2 years from now. You guessed it right; I am talking about “ELSS or Tax Saving Mutual Funds”.
|Imagine a product that helps you save tax, has a minimum lock-in of a mere 3 years, has given average annualised returns of 15 to 18% pa consistently over the past decade and offers lot of flexibility & above all is tax-free. You should not miss this product for anything. Now this product is available only till Mar 31, 2012. Read further…..|
In the recently announced Direct Tax Code 2010, the FM has removed most investment avenues available today u/s 80C like ELSS, ULIPs, NSC, KVP, 5 year Bank FDs & even Senior Citizen Savings Scheme (SCSS). All insurance plans except for Term Plan are out.
After April 1, 2012, under the DTC 2010, only the following 4 instruments would be available to save tax u/ch VI; namely:
1. All forms of Provident Funds (PPF, EPF & GPF)
2. The New Pension Scheme ( NPS)
3. Pure Term Insurance Plan (without any Investment component)
4. Any other Govt. approved fund
As is clear from the above, most investment avenues available today u/s 80C will not be available under The New Direct Tax Regime starting from April 1, 2012. And one of the most profitable investments amongst these is ELSS or “ELSS or Tax Saving Mutual Funds”.
Have a look at the table below where we have compared the performance of the 10 top performing Tax Saving Mutual Fund schemes with other investment avenues like PPF, Bank FDs & Insurance plans over a 5 year period.
|Tax saving Mutual Funds (ELSS)||Actual Returns over various periods||Value of Rs. 1 lac invested 5 years ago|
|1 Year (%)||2 Years(%)||3 Years (%)||5 Years(%)|
|ELSS Scheme 1||33.3||31.5||18.6||21.6||266,088|
|ELSS Scheme 2||19.2||20.7||13.7||21.2||261,309|
|ELSS Scheme 3||37.7||37.7||19.3||21.0||258,839|
|ELSS Scheme 4||40.9||29.1||13.8||20.0||248,728|
|ELSS Scheme 5||27.4||21.6||7.0||19.1||239,841|
|ELSS Scheme 6||32.0||23.2||12.5||18.9||237,135|
|ELSS Scheme 7||22.5||17.4||7.2||17.9||228,098|
|ELSS Scheme 8||22.4||17.4||7.2||17.9||227,905|
|ELSS Scheme 9||44.1||31.1||11.8||17.8||226,555|
|ELSS Scheme 10||36.3||22.2||10.2||16.4||213,864|
|Bank Fixed Deposits||7.5||7.5||7.5||7.5||143,563|
|In-surance – Money Back & Endow.||6.5||6.5||6.5||6.5||137,009|
The best performing Tax Saving mutual fund has given a performance of 21.6% per annum year on year for the past 5 years & the average performance of top 10 tax saving mutual funds is 19.2% per annum. Even the worst performing tax saving fund has given annual returns of 16.4% pa over last 5 years. Now compare the performance of Tax Saving mutual funds with other tax saving instruments like PPF, 5 year Bank FDs & traditional insurance plans like money back & endowments. The table below gives the value of Rs. 1 lac today had you invested in these avenues 5 years back.
|ELSS Scheme||5 Years (%)||Value of Rs. 1 lac invested 5 yrs. ago||Current Value times your investment|
|Best Per-forming Tax Saving mutual Fund (ELSS )||21.6 % pa||266,088||2.66x|
|Average per-formance of ELSS Schemes||19.2 % pa||240,385||2.40x|
|Worst Per-forming Tax Saving mutual Fund (ELSS )||16.4 % pa||213,864||2.13x|
|PPF||8.0 % pa||146,933||1.46x|
|5 year Bank Fixed Deposits (FDs)||7.5 % pa||143,563||1.43x|
|Insurance – Money Back & Endowment Plans||6.5 % pa||137,009||1.37x|
As is clear from the table above, if you had invested Rs. 1 lac 5 years back in the top performing tax saving mutual fund, current value of your investment would be Rs. 2.66 lacs; a return of 2.66x times. Even the worst performing tax saving mutual fund has given a return of 2.13x times. Compare this return to a PPF or Bank FDs or insurance plans where the return is 1.46x times, 1.43x times & 1.37x times respectively.
Other Advantages of Tax Saving Mutual Funds or ELSS:
1. After the abolition of Entry Load wef Aug 1, 2009, you do not pay any commission to your mutual fund agent. As a result, entire amount of your investment gets invested in mutual funds. Compare this with a ULIP plan where you pay as high as 20 to 40% commission to the agent for no additional benefit at all.
2. You can invest in tax saving mutual funds or ELSS in 2 ways or a combination of these; a) you can invest lumpsum amount at one go anytime within the financial year & b) you can start a Systematic Investment Plan (SIP) in any tax saving mutual fund scheme of your choice or c) you can invest via a combination of the above two.
3. There is a mere 3 year lock-in in tax saving mutual funds or ELSS. This is the minimum lock-in period amongst all tax saving instruments u/s 80C.
|Tax Saving Instrument||Expected Return (%)||Lock-in period (Years)|
|Public Provident Fund (PPF)||8% pa||15 years; partial with-drawal from 7th yr|
|NSC , KVP etc.||8% pa||6 years|
|5 year Bank FDs||6.5% pa||5 years|
|ULIP*||12 to 15% pa||5 years|
|Insurance Plans||6 to 7% pa||Depends; min 5+ years|
|Tax saving Mutual Funds or (ELSS)*||15 to 18% pa||3 years|
*market linked; average performance over past years
4. There is zero tax on capital gains from tax saving mutual funds or ELSS4. There is zero tax on capital gains from tax saving mutual funds or ELSS Also, the DTC 2010 comes into effect from April 1, 2012. This article is written in Sep 2010. We thus have exactly 18 months to invest in Tax saving Mutual Funds (ELSS). After that, this wonderful tax saving instrument would no more be available. Or in other words, you have only 2 Financial Years left (FY 2010-11 & 2011-12) to invest in this instrument.
Starting April 1, 2012, under the Direct Tax regime, as already discussed earlier in this article, there is hardly a equity linked instrument available that has a successful history of giving double digit returns. we shall therefore be forced to invest in a PPF, or a NPS or buy a Term plan to save tax. so postpone your traditional investment by 2 years & invest the maximum possible amount for the next 2 financial years in Tax saving Mutual Funds (ELSS).
Just one caveat. There are around 27 Tax saving Mutual Funds (ELSS) available in the market today. Not all of them are performing well. So please consult a Mutual Fund Expert (your next door distributor/agent might not be the best guy) to help you choose the best Tax saving Mutual Funds (ELSS) schemes for you.