Best ELSS mutual fund

Mutual fund experts suggest that it is always better to start your tax planning exercise in the beginning of the new financial year. It makes even more sense if you are planning to invest in Equity Linked Saving Schemes or ELSSs (they are also known as tax saving mutual fund schemes) to save taxes under Section 80C in this financial year. Investments in ELSSs qualify for tax deductions of up to Rs 1.5 lakh under Section 80C. So, if you are planning to invest in ELSS, you will find all the necessary details here.

ELSS vs NPS:

Equity Linked Savings Scheme (ELSS)

Equity Linked Saving Scheme or ELSS is a tax saving mutual fund. Here you can save up to Rs. 1.5 lakhs under Section 80C in a financial year. ELSS has the shortest lock-in period of 3 years with long-term capital gains over 1 lakh being taxed at 10% rate.

National Pension Scheme (NPS)

National Pension Scheme is a Government Scheme in which individuals can invest during their earning years so as to get a pension upon retirement. Investments in NPS offer a tax deduction of Rs. 1.5 Lakh under Section 80C of the Income Tax Act and an additional deduction of Rs. 50,000 under Section 80CCD (1B) of the said Act.

Comparative Analysis between ELSS and NPS

Features Equity Linked Savings Scheme (ELSS) National Pension Scheme (NPS)
What is the lock-in period? ELSS has a lock-in period of 3 years. NPS has a lock-in period up to retirement.
What is the minimum annual investment? You can invest Rs.500 either as a lump sum or SIP investment. You can invest Rs.500 as an initial contribution, but need to invest a minimum of ₹6000 in a year.
What are the tax benefits? Can claim tax deduction up to Rs.1.5 Lakh PA under Section 80C of Income Tax Act Can claim a tax deduction up to Rs.1.5 Lakh PA under Section 80C and an additional Rs.50K under Section 80CCD (1B) of Income Tax Act.
Where is the money invested? The entire amount is invested in equity in a diversified manner and is monitored regularly. A maximum of 50% is invested in equity. The rest is distributed in government bonds, treasury, etc
What about premature withdrawals? Funds invested in ELSS cannot be prematurely withdrawn. You can withdraw prematurely within certain limits and under the condition of purchasing an annuity.
Are returns taxable? LTCG over Rs.1 Lakh is taxable at 10% The maturity amount is partially taxable.

Even though NPS offers tax benefits of up to Rs. 2 Lakhs PA, as opposed to the ELSS tax benefits of up to Rs. 1.5 Lakh. However, ELSS is still the better investment option flexibility and opportunity to earn higher returns with a lock-in period of only 3 years.

ELSS vs NSC:

Earning money is often not enough to lead a stable life, with savings playing a crucial role in determining our future. While there are a number of ways to earn money, there are just a few smart methods to save it, which is why it becomes critical to choose the right saving plan. National Savings Certificates and Equity Linked Savings Schemes are two such popular saving options in the country today, each offering unique advantages.

NSC – National Savings Certificates or NSC are bonds that are issued by the government to inculcate the habit of saving among Indians. One can purchase these certificates from the post office, with the maturity period fixed at 5 and 10 years.

ELSS – An Equity Linked Savings Scheme is closely related to prevailing market conditions and is a diversified mutual fund which invests most of the corpus into equities. A lock in period of 3 years and different portfolio options can help one to make money faster.

Differences between NSC and ELSS

Features NSC ELSS
Minimum investment Rs 100 Rs 500
Maximum investment which can be claimed as tax deduction Rs 1 lakh Rs 1 lakh
Period 5 and 10 years 3 years
Risk factor Low risk High risk, depending on markets
Interest rate 8.5% per annum for 5 year term and 8.8% per annum for 10 year term No fixed interest rate
Frequency of interest accumulation Interest is compounded half yearly NA – depends on market conditions
Fixed return guarantee? Yes No, returns are not fixed
Income Tax deduction applicable? Yes, under Section 80C of IT Act Yes, under Section 80C of IT Act
Tax liability Interest earned is taxable Amount received at end of maturity is not taxable

ULIP VS ELSS :

Equity Linked Savings Scheme (ELSS)

ELSS is a diversified, equity mutual fund. The scheme invests in the capital market and selects companies with different market capitalizations. In a financial year, an investor can claim tax deduction of up to 150,000 against investments made in ELSS. These investments have a mandatory lock-in of three years. Tax deduction on the invested amount and the returns are tax-free.

Unit Linked Insurance Plan (ULIP)

ULIP is an investment + insurance product where one part of the investment is used for insuring the investor, while the other part is invested in the products of his/ her choice. Investors can choose to invest in equity, debt, hybrid or money market funds through ULIPs. Amount invested in ULIPs, up to 150,000, can be claimed as tax deduction under Section 80C of the Income Tax Act. These investments have a lock-in of five years. An investor can choose to switch from equity to debt or hybrid as per his investment objective during the lifecycle of the investment.

Differences between ELSS and ULIP:

 

Features Unit Linked Insurance Plan Equity Linked Savings Scheme
Is there any lock-in period? ULIPs have a mandatory lock-in of 5 years ELSS have a mandatory lock-in of 3 years
What returns can I expect? As the investor can choose any combination of equity, hybrid funds or debt in his investment,the returns can vary Being market-linked, the returns can vary depending on the scheme selected but an investor can expect an approximate return of 12-14%.
What are the tax benefits? The invested amount offers tax deduction under Section 80C, but the gains are taxable. EEE (Exempt Exempt Exempt) – The invested amount is exempt from taxes at the time of investment, accumulation and withdrawal.
What are the charges applicable? There are complex and multiple charges like policy administration charges, premium allocation charges, mortality charges, etc. Exit load and fund management charges are specified in the SID clearly and are easy to understand.
What about liquidity? Funds can be available after the lock-in of 5 years subject to further policy conditions. Funds will be available after the lock-in of 3 years.

ELSS vs SIP:

 

Equity Linked Savings Scheme (ELSS)

ELSS is a diversified, equity mutual fund. The scheme invests in the capital market and selects companies with different market capitalizations. In a financial year, an investor can claim tax deduction of up to 150,000 against investments made in ELSS. These investments have a mandatory lock-in of three years. Tax deduction on the invested amount and the returns are tax-free.

Systematic Investment Plan (SIP) 

Systematic Investment Plan or SIP is a method of investing in mutual funds. Through this method, you choose to invest a pre-determined amount at fixed intervals (weekly, monthly, quarterly or even annually) into the mutual fund. SIPs instil discipline and help you accumulate wealth through a planned investment approach and with the help of Rupee cost averaging.

Difference between ELSS and SIP

ELSS and SIP are two very different concepts. While ELSS is a mutual fund scheme which invests in equity-linked securities, SIP is just a method of investing. Therefore, including ELSS, SIPs can be fixed on all kinds of mutual funds.

ELSS allows you to avail tax deduction of up to Rs1.5-lakh/annum under Section 80C of the Income Tax Act. Apart from this, dividends and long-term capital gains (LTCG) of up to Rs1-lakh/annum are tax-free. LTCG above Rs1-lakh is liable to be taxed at the rate of 10% annually as proposed in the FY19 Budget. SIPs made only in ELSS mutual funds are considered under Section 80C in country.ELSS has a fixed a lock-in period of 3 years, while the period of the SIP entirely depends on the nature of its mutual fund.

ELSS SIP
ELSS is a type of mutual fund SIP is a method of investing
ELSS involves only Equity securities SIP can be of any kind of security
ELSS helps in tax benefits Depending on the type of investment
Tax benefits vary.

ELSSvs Mutual fund       

Equity Linked Savings Scheme (ELSS)

ELSS is a diversified, equity mutual fund. The scheme invests in the capital market and selects companies with different market capitalizations. An investor can claim tax deduction of up to rupees 150,000 in a financial year, against investments made in ELSS. These investments will have a mandatory lock-in period of three years. Tax deduction on the invested amount and the returns are tax-free.

Mutual Fund

A Mutual Fund investment scheme collects money from people and invests the pool of funds in various assets. The money that is collected from various investors is usually invested in financial securities like shares.Equity, debt and money-market instruments are broad classifications of asset classes. These investments may be made for the short term, medium term or long term. The kind of asset invested in also determines the risk factor of the funds.

Difference between ELSS and mutual funds:

  • Only ELSS Mutual Funds offer tax benefits under section 80C of the Income Tax Act. By investing in ELSS funds, one can avail tax exemptions up to INR 1,50,000 as per this section.
  • ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity that carries high-risk and have the potential to deliver high-returns as compared to large cap funds and debt funds.
  • The lock-in period of ELSS which is allowed to be claimed as a deduction under Section 80C is 3 years. These mutual funds cannot be sold before 3 years.
  • ELSS returns are tax free after the lock-in period of 3 years. Whereas equity funds returns are tax free is sold after one year when they are accounted under long term capital gains tax.
  • Depending on your investment goals choose the right mutual fund available in market.

Comparison btw ELSS,PPF and MFS:

Equity Linked Savings Scheme (ELSS)

ELSS is a diversified, equity mutual fund. The scheme invests in the capital market and selects companies with different market capitalizations. An investor can claim tax deduction of up to rupees 150,000 in a financial year, against investments made in ELSS. These investments will have a mandatory lock-in period of three years. Tax deduction on the invested amount and the returns are tax-free.

Public Provident Fund (PPF)

PPF or Public Provident Fund is a tax free savings and investment scheme by the Government of India. It is offering a fixed rate of interest. The maturity period of these investments is 15 years and an investor has to make a minimum yearly deposit of rupees 500. The maximum amount of investment in a financial year is rupees 150,000 which offers tax deduction under Section 80C. The interest earned and the maturity amount is tax free too.

Mutual Fund

A Mutual Fund investment scheme collects money from people and invests the pool of funds in various assets. The money collected from various investors is usually invested in financial securities like shares and money-market instruments like a certificate of deposit and bonds.

Equity, debt and money-market instruments are broad classifications of asset classes. These investments may be made for the short term, medium term or long term. The kind of asset invested in also determines the risk factor of the funds.

Comparison between ELSS/PPF/MFs

Particulars PPF ELSS MFs
What is the risk involved? PPF investments are very safe because it is backed by the Government of India. Being an equity fund, the investments are subject to market risks. The level of risk in a mutual fund depends on what it invests in. Stocks are generally riskier than bonds
What returns can I expect? The Government declares the rate of interest for PPF investments every year. It is usually 7-8 percent per annum. An investor can expect an approximate return of 12-14%. Mutual fund investors can expect an average annual return of 12 percent of the amount, based on the long-term performance of the S&P 500.
What are the tax benefits? EEE (Exempt Exempt Exempt) – The invested amount is exempt from taxes at the time of investment, accumulation and withdrawal. EEE (Exempt Exempt Exempt) – The invested amount is exempt from taxes at the time of investment, accumulation and withdrawal. Investments in ELSS qualify for tax deduction of up to 1.5 lakh rupees under Section 80C Income Tax Act.
Is there any lock-in period? Investment is locked in for a period of 15 years. ELSS investments have a lock-in period of 3 years with no possibility of premature withdrawal. Most mutual funds do not have a lock-in period.
Is there a maximum time limit for investment? You cannot make PPF investments for more than 15 years. ELSS investments have no upper time limits. MFs limit is three years
How much can I invest? Investor can invest any amount between 500 and 150,000 in a financial year, either in lump sum or in 12 installments. You can invest as much as you want. However, under Section 80C of the Income Tax Act, only 150,000 in a financial year will be allowed for tax deduction. The maximum amount an investor can invest 50 crore rupees.

Here you will find the details about all kind of mutual fund and how to choose the appropriate mutual fund that will match your portfolio.