Tax Saving Mutual Funds : Best way to save tax

The equity asset class has been in a sweet spot in recent years with the S&P BSE Sensex returning nearly 13% CAGR in the past four years ended January 15, 2018. On the other hand, interest rates on fixed income tax-savings instruments have been declining in recent years. For instance, the interest on the popular public provident fund (PPF) has fallen from 8.7% in 2014 to 7.6% today. The real or inflation-adjusted return on these instruments is barely enough to meet an individual’s wealth-creation needs. Hence, when it comes to tax planning, it is remunerative to choose equity instead of traditional debt-based tax-saving products in the long term. Equity-Linked Saving Schemes (ELSS) that are eligible for Section 80C deductions not only help to save tax but also build wealth.

ELSS helps in harnessing power of equity

Equity is one of the best wealth creation avenues available to investors over the long term. The asset class as represented by the market benchmark  S&P BSE Sensex has returned, on average, 15% CAGR for a 15-year holding period since its inception (1979). ELSS allows investors to harness this power of equity. However, investors should note that despite the fact that this product has the lowest lock-in period among tax-saving products under Section 80 C, it would be optimum for investors to retain their investments over the long term.

This not only reduces the volatility associated with the asset class but also provides an optimum return solution for investors (chart). The ELSS category as represented by the CRISIL – AMFI ELSS Fund Performance Index has returned 19% CAGR, on average, in the 10-year rolling period since June 2001 (inception date of the index).

Source : CRISIL and RBI

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