But they still perceive it as a risky and complicated investment proposition.

Increasing popularity of ELSS…

(Source: AMFI, PersonalFN Research)

As a result, despite witnessing steady inflows, ELSS remains a less preferred option for the purpose of tax-saving vis-à-vis other tax-savings investment options—especially life insurance.

As per the findings of the survey conducted by the Foundation of Independent Financial Advisers And Final Mile Consultancy:

• 27% of the respondents felt mutual funds were too risky and volatile for them to invest
• 30% thought mutual fund investing was too complicated
• But interestingly, 24% of the total 384 respondents stated that nobody recommended mutual funds to them; and
• 13% investors had a bad experience with advisers.

Although the sample set of the survey was too small to depend on, it brought forward some crucial shortcomings.

• 57% respondents had inadequate information about the product—mutual fund
• 37% respondents were constrained by the ineffective distribution network of mutual funds.

Life insurance remains one of the most preferred tax-saving option of investors. The reasons are:

1. Investors believe they are better designed to offer payouts at critical junctures of the life—i.e. whenever the financial goal is up for the fulfilment.
    
2. Under conventional investment-cum-insurance plans, not only are the returns guaranteed, but it is often topped-up with loyalty bonuses and profit shares.
    
3. Proceeds of the life insurance policy are tax-free. The Budget 2018 has proposed to tax Long Term Capital Gains (LTCGs) on equity investments.
    
4. Life insurance products help address protection as well as investment needs of a person under one umbrella and investors often don’t have to go searching for alternatives. Moreover, they are better marketed and more aggressively pushed vis-à-vis ELSS.

Unit Linked Insurance Plans (ULIPs) and traditional life insurance policies neither offer you optimum protection nor do they make a good investment. They are loaded with various charges and eventually eat into your returns. Therefore, it’s better to keep insurance and investments at arm’s length.

Let’s go back to basics and list out the investment avenues available under

Section 80C:

• Life Insurance Premium
• Public Provident Fund (PPF)
• Employees’ Provident Fund (EPF)
• Sukanya Samriddhi Yojana
• National Saving Certificate (NSC), including accrued interest
• 5-Year fixed deposits with banks, Post Office, HUDCO and NHB
• Senior Citizens Savings Scheme (SCSS)
• National Pension System (NPS)
• Unit-Linked Insurance Plans (ULIPs)
• Equity Linked Savings Schemes (ELSS)
• Pension Plans
• Tuition fees paid for children’s education (maximum 2 children)
• Principal repayment on Housing Loan

Now that you know about the various investment instruments that are available, before you invest, ask yourself the following questions:

• How much risk are you willing to take on the investment?
• How much risk are you willing to take on the investment?
• Do you want your returns to be tax free?
• Do you want the maturity values of your investments to be non-taxable?
• Do you need liquidity?

Want to save your hard-earned money from the tax-man and reduce your tax burden? Download PersonalFN’s (Comprehensive Guide to Tax Planning (2018 Edition). Download now!

Should you invest in ELSS?

If you have a high risk appetite and hold on to your investments for atleast five years, invest in ELSS would suit you best. Among investment avenues qualifying for the deduction u/s 80C; ELSS have the shortest lock in a period of three years and have the highest potential to reward investors.

Nonetheless, like in the case of any other mutual fund category, selection of a scheme matters the most. You should select a fund with a proven and consistent track record.

Editor's note: As an investor, you need to pick the right and suitable ELSS funds to meet your financial goals. Hence, a process that combines both quantitative and qualitative factors has a good chance of picking funds that can deliver decent market-beating returns. The quantitative factors will cover the fund’s performance across multiple periods and market cycles, as well as the fund’s ability to manage risk among other factors. The qualitative factors will take into account the fund manager’s experience, the performance of the fund house across multiple schemes, as well as the quality of assets in the portfolio, to name a few. Thus, when analysing a fund across both quantitative and qualitative parameters, you will be able to pick a fund that has a promising future. PersonalFN adopts such a process to shortlist the potentially best mutual funds for its subscribers. If you are looking for the top ELSS funds, subscribe to PersonalFN’s Exclusive Report - 3 Tax-Saving Mutual Funds For 2018. In this report, you will find the Top 3 ELSS that are geared to grow your investment multi-fold over the long term while saving your taxes. These Top 3 ELSS are handpicked through our special 7-point Selection Matrix methodology, and these are considered to be potentially the best tax-saving mutual funds in the Indian market.

Add Comments