Advantages of ELSS over other Tax-Saving Instruments

ELSS-fundsThe end of a financial year marks the beginning of a new one and so does planning of one's tax saving. Now is the time to take control of your hard earned money of the past year and also plan ahead for the future, because all of us would like it if we get larger chunk of hard earned money and to ensure the same, we must invest sensibly.

There are several tax saving schemes in the market and with the hike in deduction under section 80C, the tax payers can reduce the income that will go out. But in order to be able to invest well, one must know the appropriate tax saving option as well. Some of the most common tax saving instrument are, ELSS, Ulips, PPF, Bank Fixed Deposits (FDs), National Saving Certificates (NSCs), National Pension Schemes (NPS), Senior Citizen's Saving Schemes and Other Life Insurance Plans.

But when it comes to investing and tax saving one must go for a plan that get the best of both and one such scheme is the Equity Linked Saving Scheme (ELSS). It is quite a popular tax saving option that offers good diversification of funds and reasonably good returns. To further define the benefits of ELSS, here's a little more about them:

Defining ELSS

ELSS is a mutual fund type that invests majority of its corpus in equity and its related products. Thee come with a minimum lock-in period of 3 years and have tax benefits attached. Since their performance depends upon fluctuation of equity markets, these are suitable for investors with high risk profile. Being open-ended funds, an investor can pot to invest in the fund any day.

Objective of Your ELSS Investments

ELSS investments can cater to different types of investors who want to choose their savings within ELSS for different financial objectives, hence one can choose from the below options:

  • Growth Option- When invested with the aim to grow one's funds, the income earned by the fund is not distributed to the unit holders. Hence no dividends are earned, but go on to contribute towards the NAV of the fund. So when the investment holdings are sold, investor realizes long term capital gain or loss.
  • Dividend Option- Income earned by the fund is distributed amongst the unit holders as dividends. The fund declares when will the dividends be distributed and in case of no or negative returns, there is no distribution. Dividends received are not liable to be taxed.
  • Dividend Reinvestment Option- Some investors chose to reinvest the dividends declared by the fund, thus resulting in a fresh purchase.

Apart from the above options of investments in ELSS, an investor can also opt for monthly investment of funds in ELSS via Systematic Investment Plans (SIP). This way suits the small investment and a mere contribution of Rs 500 each month can get the investor the benefit of averaging out the cost.

Other benefit of investing in ELSS is the minimum lock-in period of 3 years, which requires the investments to stay for that duration. When compared to other tax saving schemes range within 5-15 years. Also, ELSS being diversified funds, the returns of the same are in line with the equity indices and if the fund managers are competitive and capable, picking the right stocks and holdings can help build a profitable portfolio, returns on which can be much higher than other tax saving instruments.

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