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Mutual Funds | 19 Sept 2019

Tax Saving Mutual Funds Vs Traditional Tax Savings Plan

Whenever it comes to investments our brain waivers between returns and tax savings. We are left wondering which one to choose because if we pick good returns then we have to leave tax saving and if we go with tax saving the returns will be as low as negligible.

We all are aware of the fact that there are many investment plans that enable us to take benefit of tax deduction under section 80C of the income tax act. Such as:

  1. Equity Linked Saving Scheme( ELSS)
  2. Life Insurance
  3. Public Provident Fund or PPF
  4. Tax Saving Term Deposit

Equity Linked Savings Scheme or ELSS is a mutual fund scheme that invests your money in the equity market. There is a lock-in period of 3 years and you can take tax benefit under section 80 C of the income tax act. This scheme helps you not only to save tax but also grow your fund size at the same time.

Comparison of ELSS with the other traditional plans.

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ELSS Or PPF Account

PPF account stands for public provident fund account. The lock-in period is of maximum 15 years which is quite a long term to lock your funds in an investment plan whereas in ELSS the maximum lock-in is for 3 years, therefore, you can liquidate your funds after 3 years depending upon the fund performance. You can choose to stay invested as well.

If we compare returns, PPF pays 8 to 8.5% interest whereas ELSS gives you approximately 16% returns. Moreover, mutual funds invest in the equity market in a more diversified manner and thus your fund can beat inflation with higher returns.

ELSS or Life Insurance

Under traditional or unit-linked insurance plan the minimum lock-in is for 5 years and you have to pay high fund management charges for 5 consecutive years. In ELSS, the charges are as low as 2%.

On the contrary, ULIP levy charges under many heads such as administrative charges, fund allocation charges, fund management charges, etc. These, in turn, ends up eating your returns. Therefore, in the end, the returns in ELSS is going to be much more than in ULIP.

ELSS or Term deposit

Every bank or post office offers fixed deposit under section 80C where the deposit term is 5 years. Which means you cannot break your FD prematurely before 5 years. The rate of interest is 8.5 % but again the interest you earn is taxable. The returns in FD is very low as compare to ELSS and it also locks your money for 5 years.

Over the past few years, things have changed radically. We have moved from typewriter to laptop, from telephone to smartphone, from bullock cart to car. When things around us are changing on such a swift pace so why we should not change our investment perspective from traditional tax saving plans to Mutual funds.

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