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6 reasons Why ELSS is Better Than Other Tax Saving Instruments

There are multiple ways to save tax and we have previously highlighted 19 ways to save tax. Of all the tax saving options available under 80C ELSS is the better option available. Read on to know why.

  1. High market linked returns

ELSS mutual funds have historically given returns up to 23% (annualized). Since they are market-linked instruments their returns are dependent on the market. Hence, they give higher returns than other tax saving instruments. Other tax-saving instruments have given returns around 8% (annualized). However, investment in ELSS funds should be made with a medium to long term horizon. That is when one can reap maximum benefits from it.

Investment OptionReturn
ELSS16-23%
5 Year Bank FD5.5-7.75%
PPF8.1%
EPF8.55%
NSC7.9%
NPS12-14%
ULIP12-14%
SSS8.5%
Life Insurance0-7%
  1. Short Lock-in

ELSS funds have the shortest lock-in period than other tax saving instruments. ELSS funds have 3 years lock-in while others have around 5-15 years. Tax saving FD has 5 years, PPF has 15 years, and money invested in NPS is locked in till retirement. ELSS enjoys a short lock-in than other tax saving options.

Investment OptionLock in (Years)
ELSS3
5 Year Bank FD5
PPF15
NSC5
NPSTill Retirement
SSSTill the girl turns 18 years
Life Insurance5
  1. Flexibility

Investing in ELSS funds can be very flexible for investors. They can choose to invest in the form of a SIP or a lump sum. However, investing through SIP is highly recommended as it helps in averaging out the cost of investment and hence give higher returns to investors. Also, it inculcates financial discipline with regular investing. SIP investing also removes the trouble of timing the market as investment happens on a regular basis.

Also, investing in ELSS gives investor enough choice. There are multiple funds to choose from and if one fund is performing poorly then the investor has a choice to move from one fund to the other. But in case of ULIPs, which give similar returns as ELSS in the long-term, one doesn’t have the option to choose from a lot of the funds to invest. One has to choose from the limited options available to them.

  1. Choice of maturity/investment horizon

ELSS funds have a minimum lock-in period of 3 years. After that, the investor can choose to stay invested in the fund for as long he/she wants. The longer one stays invested in these funds the better it is for the investor. Long-term and investing and SIP are the best combination to create wealth. Let’s take the example of ABSL 96 Tax Relief ELSS fund. A yearly investment of ₹1,50,000 in Aditya Birla Sun Life Tax Relief 96 since the launch of the fund in March 1996 has generated high annualized returns of 21.60% depicting consistency over the long-term. An overall investment of ₹33 lakh spread over the last 22 years has become a whopping ₹5.67 crores as of 30 Oct 2017.

  1. Dual benefits during volatility

Investing in ELSS funds gives you dual benefits. Firstly it provides protection in times of volatility as it as a 3-year lock-in period. Having a lock-in period stops investors from pulling out the money from the fund due to falling returns. But investing and staying invested throughout the time of volatility is beneficial for the investor. This is because the average cost of investment will come down and will give higher returns when the market grows back again. Secondly investing in ELSS funds inculcates financial discipline in investors with the lock-in period of 3 years. Usually, ELSS funds become the first point for many to start their investing journey. So ELSS funds not only teaches financial discipline but also instill investor confidence on equity investment.

  1. High degree of transparency and compliance

Mutual funds are regulated by SEBI. All mutual funds (including ELSS funds) are managed by Asset Management Companies (AMC’s). AMC’s are continuously monitored and regulated by SEBI. They are mandated to give out key information on a regular basis. For example, NAV and TER data should be given out daily, and returns have to be updated on a quarterly basis. Not only are the AMC’s regulated by SEBI but also the distributors. A unique ARN code is given to every distributor and any malpractice by them can be reported using this ARN.

Now you know clearly who the winner is! Save your taxes by investing with Upwardly. Happy Investing!

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