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ELSS Mutual Fund V. Fixed Deposit

Asefa Hafeez

One of the best investment options for tax savings is an equity-linked saving scheme (ELSS) mutual fund. As they invest 80% of their assets in equities, they fall under the category of equity mutual funds as opposed to debt mutual funds. Section 80C of the Income Tax Act of 1961 allows for a tax exemption of 1.5 lakh INR for investments made in ELSS mutual funds…

 

 

 

 

How Does An ELSS Funds Work?

 

The best mutual funds for tax savings are equity-linked savings schemes and mutual funds. A portion of the corpus of ELSS mutual fund may be invested in debt, however, at least 80% of its corpus is invested in equity securities.

 

For their investors, ELSS funds offer both capital growth and tax savings. Three years is the lock-in period for ELSS mutual funds. Section 80C of the Income Tax Act of 1961 allows investors to deduct up to Rs. 1.5 lakh in taxes per fiscal year.

 

 

Benefits Of ELSS Mutual Funds

 

 

The main factor making ELSS a fantastic investment option is tax savings. Under Section 80C of the Income Tax Act of 1961, investments in ELSS up to Rs. 1.5 lakh per year are eligible for a tax deduction.

 

However, please note there is no maximum investment limit associated with ELSS mutual funds because you are free to deposit whatever amount. However, beyond Rs. 1.5 lakhs in investment, there are no tax advantages.

 

 

The 3 year lock-in period for the ELSS investment is enshrined in law. The lock-in period reduces initial equity investment volatility and promotes the reinvestment of earnings.

 

You should be aware, that the lock-in period begins on the day of purchase. For instance, if you deposit one lakh rupees all at once and receive 100 units on Jan 1, 2022, only on Jan 1, 2025, the lock-in period will end.

 

However, if you make monthly SIP investments, such as 10 units on Jan 1, 2022, 10 units on Feb 2, 2022, and so on. The lock-in term will thereafter end on Jan 1, 2025, for the first 10 units, Feb 1, 2025, for the second 10 units, and so on.

 

 

Two ways exist for investing in ELSS. If you receive a steady paycheck, you can use a SIP to invest each month. In the alternative, if you have extra money, you can invest it all at once in ELSS.

 

With a SIP, you can invest as little as Rs. 100 each month in ELSS. You can compare SIP with the lumpsum investment option and thereafter decide. 

 

 

The ELSS mutual funds are invested primarily in equities and equity-related securities in order to generate gains (up to 80%). Equities are riskier than debt, bonds, or money market securities like certificates of deposit (CDs), treasury bills, and money market funds.

 

Before making an equity investment, you should also evaluate your risk tolerance. Over time, ELSS mutual funds have provided better returns historically than fixed deposits, although they can be volatile in the short term.

 

Top 5 ELSS mutual funds have offered returns of 12 per cent (CAGR) in the past 5 years which is better than returns offered by fixed return schemes like PPF.

 

 

Not all ELSS investment gains are exempt from taxes. The capital gains from ELSS investments held for a period of three years or more are considered long-term capital gains (LTCG), and any capital gains over Rs. 1 lakh are subject to a 10% capital gains tax.

 

 

Compared to other tax-saving investments like PPF, top ELSS funds have the potential to produce larger returns, as has the case been, historically if we compare the top 5 ELSS mutual funds basis their 5-year CAGR with PPF and NPS. The risk that the fund houses took while investing was investing heavily in equities and that is what led to these tremendous returns. Some ELSS funds invest in mid-cap companies, when compared to ELSS mutual funds that primarily invest in large-cap companies, these funds can produce larger returns potentially since historically mid-cap companies have grown at a pace higher than that of large-cap. 

 

 

The amount that an investor can put into ELSS funds has no upper limit.

 

 

ELSS mutual funds are managed by qualified fund managers. As a result, even an investor with limited or no market understanding can have his/her money professionally managed by investing in the ELSS mutual funds. In comparison to other conventional tax-saving strategies, professional management aids investors in obtaining larger profits.

 

 

How Can I Invest In ELSS Mutual Funds?

 

 

Mutual fund schemes provide varying results. For example, as on 1 July the Parag Parikh Tax Saver Fund gave a return of 10.49 per cent whereas IDFC Tax Advantage (ELSS) Fund gave for the same period gave a return of 3.22%. The top mutual funds are quite difficult to anticipate when these numbers are taken into account. However, there is a good possibility that the mutual fund with the highest return last year has good management and investment strategy. 

 

 

The regular scheme and direct scheme are the two schemes available to any investor when investing in ELSS mutual funds. Due to payments made to those that distribute mutual funds, the regular schemes’ expense ratio is significantly higher than that of the direct schemes.

 

The main distinction between the plans is that they will each have a different NAV. When weighed against one another, one should choose the direct plan.

 

 

All of this is only possible if you have a working bank account, as this is where all of your funds will be taken out for investments and dividends credited.

 

 

When choosing an intermediary in order to invest in the mutual fund make sure the platform/app you choose offers only a direct mutual funds. Kuvera is India’s leading mutual fund investment app which offers only direct mutual funds. 

 

 

Online ELSS investments are simple, paperless, and convenient. It saves you from unnecessary paperwork and saves the environment too. 

 

 

After selecting the ELSS fund type, the investor can make investments through SIPs or a single lumpsum investment. Minor investors who want to make frequent, small investments to reduce their tax burden might consider ELSS mutual funds. However, if a buyer has a lump sum amount ready, they can also put all of it into the best ELSS funds.

 

How Should I Select ELSS Mutual Funds?

 

It’s crucial to assess a mutual fund before investing. Since no two investors are exactly alike, no two investors can be served by the same fund. However, there are particular guidelines that all investors can use to assess mutual funds before making an investment in them. A few suggestions for investors are provided below.

 

 

Any investor will look at the fund’s performance first. While checking the performance of the fund, the current performance and the prior performance has to be checked. Additionally, its consistency must be examined. Investors must contrast the performance of the fund with that of the benchmark. The better a fund is, the more consistently it performs.

 

 

Investors must investigate the fund house, its governance, and its level of experience. The fund manager will be more adept at managing the portfolio of the fund in all circumstances the older the fund house and the more experience they have.

 

 

The price an investor pays to invest in mutual funds is known as the expense ratio. It is determined as a portion of the NAV. Investors must therefore ensure that the fund has a low expense ratio. The returns will be higher the lower the expense ratio.

 

 

The fund’s tax regulations at maturity are crucial. Investors need to be aware of both the short- and long-term tax repercussions of redeeming their investment.

 

 

The Sharpe ratio compared the fund’s return to its risk. Therefore, the better the fund, the larger the ratio. Sharpe ratio is calculated as follows:

 

 Sharpe ratio = (Average Portfolio Return Risk-Free Rate)/Position Standard Deviation

 

 

By calculating how much the fund’s return changes around the average return, the standard deviation of the fund reveals the performance volatility of a fund. Better is a lower standard deviation.

 

Top ELSS Mutual Funds – 2022 

 

Basis the past 5-year performance in terms of CAGR following are the top ELSS Mutual Funds of 2022, arranged in order of highest to lowest return: 

 

 

 

 

 

 

Is the ELSS maturity amount tax-deductible?

 

The amount invested in the ELSS mutual fund is tax-exempt under Section 80C of the Income Tax Act, up to an amount of 1.5 Lakh. However, the gains made on the investment are taxable. ELSS mutual funds are categorized as equity funds and are taxed accordingly. Long-term capital gains (LTCG) is 10% for equity funds.

 

Since one cannot sell an ELSS mutual fund before 1 year, short-term capital gains tax is irrelevant for the purposes of an ELSS mutual fund. As a result, after the lock-in period is up and the units are redeemed, any gains (if any) over Rs. 1 lakh are subject to a 10% LTCG tax. Additionally, even after a 3-year lock-in period, the investor may continue to maintain the investment in ELSS funds.

 

 

ELSS Mutual Fund Checklist

 

 

 

 

 

 

What is a Fixed Deposit

 

Banks, post offices, businesses, and other institutions offer fixed deposits (FDs), which are term deposits. These deposits are one of the most secure investing options. Additionally, they are reputed to provide greater returns or interest than a savings account.

 

However, not all fixed deposits are risk-free; for instance, corporate fixed deposits are riskier than bank FDs, therefore investors should exercise caution when purchasing them.

 

Investors can choose to deposit money here for a variety of terms depending on their needs and requirements. Tax deductions under section 80C are only available to FDs with a lock-in duration of five years.

 

For investors looking for safe, consistent profits with minimal risk, fixed deposits have proven a terrific option.

 

Characteristics of Fixed Deposits:

 

Due to its customer-oriented features, which are detailed below, fixed deposits have been regarded as a fantastic vehicle of investment.

 

  1. Tenure

 

The typical term range for fixed deposits is 7 days to 10 years. Fixed deposit interest rates vary according to various tenures and other elements.

 

  1. Secure investment options

 

Compared to other investment options, fixed deposits are thought to be a safe mode of investing. These deposits have greater stability and minimal danger. To assess their reliability and comprehend the likelihood of default, investors should investigate the ratings of other NBFCs and organisations other than banks before making any investments.

 

  1. Payments

 

Fixed deposits provide predictably and fixed returns on deposits. These deposits provide a lower rate of return due to lesser risks.

 

  1. An untimely or partial withdrawal

 

In FDs, premature withdrawals are permitted under particular terms and conditions (which may include penalties) established by the institutions. Additionally, some banks offer the option of early withdrawals without incurring any fees. Premature or partial withdrawals are not permitted with tax-saving FDs, though.

 

  1. Tax Advantages

 

Investors may deduct up to Rs. 1.5 lakhs of interest on fixed deposits with a 5-year lock-in under Section 80C of the Income Tax Act, 1961.

 

ELSS v. Fixed Deposit (FD)

 

Both ELSS and FDs may appear to be ideal options when you are thinking about ways to reduce your tax liability through investing. However, it is essential to assess the options in light of your unique financial portfolio. Some factors to consider include age, income, risk tolerance, and time.

 

ELSS, which is best suited for investors with a high-risk tolerance, is essentially a mutual fund investment. The investment is well-liked by people who want to build wealth while reducing their tax obligations.

 

Because you have more time to take on such risks if you’re a young investor, ELSS may be a good option. With one of the shortest lock-in periods among other tax-saving investments, ELSS is another enticing option for investors who can only commit money for a three-year period. Because of their potential for respectable returns, ELSS can also be employed to achieve specific monetary objectives.

 

Fixed deposits are an excellent investment for those who have limited tolerance for risk because they are handy and safe. Seniors and older investors frequently choose this over other possibilities.

 

The lock-in term is five years, which is still less than some other tax-savers, and returns are assured. Being able to invest in an FD at a branch or online is also simple for anyone with a bank account.

 

Should I Invest in ELSS Mutual Funds?

 

Investments in ELSS mutual funds are available to any person or HUF who wants to take advantage of section 80C tax savings. There is a certain amount of risk associated with ELSS mutual funds.

 

This is a result of the portfolio’s exposure to equity securities up to 80%. Therefore, people who understand the risk associated with the equity asset class are most suited for ELSS mutual funds. Comparing these tax-saving funds to other tax-saving plans such as tax saver FDs, they have given better returns historically.

 

Investors should consider the long term while making ELSS investments. ELSS funds have the shortest lock-in time out of all asset classes that are eligible for tax deductions under Section 80C of the Income Tax Act.

 

Investors can diversify their holdings with ELSS funds. These tax-saving funds are managed by devoted, qualified professionals. By investing in ELSS mutual funds through SIPs, even small investors can reduce their tax liability. Top 5 ELSS funds have historically produced returns of 12 per cent compounded annual growth rate (CAGR) and above in the past 5 years.

 

How to book an FD on Kuvera?

 

Kuvera allows you to open an FD account for free and earn up to 7.35 % interest. If you choose to invest via Kuvera, you will not need a separate savings account. You can invest in FDs of banks and NBFCs with your primary bank account linked to Kuvera. Here are the simple steps to set up an FD account on Kuvera: 

 

Step 1: Install the Kuvera app or visit our website to sign up.

 

Step 2: Verify your KYC with PAN, Aadhaar, and in-person through video.

 

Step 3: Go to ‘Home’ and select ‘Invest’

 

Step 4: Click on the ‘Fixed Deposit’ option.

 

Step 5: You will see a list of multiple FD options on Kuvera, sorted by tenure, bank, NBFC, etc. Click on any FD to explore its tenure, interest rate, minimum deposit, and lock-in period. 

 

Step 6: Choose the fixed deposit you wish to invest in, and tap ‘Start FD.’

 

Step 7: Enter the IFSC code, account number, and account type of your primary bank account. 

 

Did you know? You can now invest in ELSS or tax-saving funds on Kuvera:

 

Step 1: Download the Kuvera app or visit our website. 

 

Step 2: Create your account on Kuvera by completing the mandatory KYC procedure. This will hardly take a few minutes. Once that’s completed,  select the ‘Invest’ option on our homepage after which you can select ‘Mutual Funds’ and ‘ELSS’. 

 

Step 3: Kindly go through the list of all zero-commission direct plans of ELSS schemes to start investing.

 

 

Interested in how we think about the markets?

 

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