Equity-linked savings schemes (ELSS) are types of mutual funds that primarily invest in shares and share-related products. When you invest in these funds, you may enjoy tax deductions under the Income Tax (IT) Act’s Section 80C. The minimum lock-in period for your investment in ELSS is three years.
On the other hand, pensioned mutual funds invest almost 60% of the corpus in debt-related products. The balance is invested in stocks and stock-related instruments. Your investment in the notified pensioned mutual fund is also eligible for tax benefits under section 80C of the Income Tax Act, 1961.
Both these tax saving schemes come with pros and cons. Here are five factors that may help you decide on which product suits your personal needs.
Because the stock market is uncertain and volatile, the ELSS funds are exposed to high risk. Pensioned mutual funds also invest in shares and share-related products, which exposes these to market risks. However, some portion of this market risk is offset by the returns earned on debt-related investment products. Although ELSS funds may seem riskier, their performance has been positive over the long run.
Tenure and lock-in period
You must remain invested in an ELSS fund for a minimum period of three years. At the end of this period, you may exit your investment, if desired. The amount invested in pensioned mutual funds cannot be withdrawn until you reach the age of 58 years. The primary objective of these tax saving investments is to enable you to build a retirement corpus, which ensures your financial independence even after you retire.
Technical development has made it easier for you to invest your funds. Irrespective of whether you choose to invest in an ELSS fund or pensioned mutual fund, you may choose the online investing option. This makes it convenient and quick to complete the entire procedure.
Your money remains locked in for a period of three years in an ELSS fund. At the end of this period, you may exit the scheme, which makes it more liquid as compared to pensioned mutual funds. In the case of pensioned mutual funds, you are unable to withdraw the amount invested in funds until you retire, which makes such investment illiquid.
Currently, there are only three pensioned mutual funds available in India. These include Reliance Retirement Fund, UTI Retirement Benefit Pension Fund, and Franklin Indian Pension Plan.
Everyone wants to save tax and reduce his liability. However, it is important you follow a disciplined investment schedule and invest some amount every month in different tax saving instruments. Most financial experts advise you to invest a lump sum amount only if your investment horizon is between seven and ten years.
Generally, most people think about how to save tax, particularly during the last quarter of the financial year. Although investing is advisable at all times, making a single investment has certain drawbacks. You may have to invest when the market is at its peak, which means you may have to remain invested for a longer period to earn returns on your investment.
The choice between ELSS and pensioned mutual funds is based on your personal financial goals and situation. You need to analyze your short-, medium-, and long-term objectives to select the appropriate tax-saving fund.