Megha has always listened to her father. After her BCom and MBA, she got a job in a multinational corporation. When she got her first salary after deductions credited to her bank account, her father sat her down and explained she must save right. In FDs and RDs, just like he did. If you want, you can even inquire about how to open a PPF account with your bank.
But Megha had other ideas. She had heard her colleagues speak about Mutual Funds and ELSS and Stocks. “No way!” Said her father. “Anything related to the stock market is risky!
Megha had anticipated his reservations. Show she did her own research and also requested help from her bank with brochures. “Baba, Mutual Funds give much better returns and are a fairly safe option as the risk is diversified”, she began. “And, ELSS, even more so.”
What is ELSS?
Simply summed up, ELSS or Equity Linked Savings Scheme is a close-ended mutual fund that offers eligible for 80C deductions up to Rs. 1.5 lakhs annually.
An ELSS mutual fund invests at least 80% of its total assets in equity and equity-related instruments. ELSS can be invested using both SIP (Systematic Investment Plan) and lump-sum investment options. ELSS funds offer great tax benefits, and unlike FDs, the dividend earned on the investment will not be subject to tax deduction. You can also choose to go for a dividend payment ELSS fund to get returns during the lock-in period just like in the case of term deposits.
What about FDs?
FDs or Fixed Deposits are perfectly safe, declared her father. There are two kinds – the tax saving ones which have a lock in for 5 years only and the normal ones with a tenure starting from 7 days.
Investing money in Fixed Deposits with banks allows you to claim a tax deduction of up to ₹1,50,000 in a financial year. These deposits have a lock-in period of 5 years. Best, part, you can avail loans against your FDs at competitive rates. The interest earned on these deposits, however, is taxable as per the tax bracket of the individual. Also, senior citizens are eligible to get a higher rate of interest on term deposits.
You can also get a loan/overdraft can be availed against a regular FD or apply for a credit card.
ELSS vs Tax Saving FDs
Megha quickly showed him the comparison chart the brochure provided:
Tax Saving FD
|Outline||ELSS is a mutual fund that invests 80% of your capital in equities.||FD is traditional investment of lump sum with any bank.|
|Returns||Subject to equity market risks but can deliver 14%-16% returns||Interest rate starts from 6% to 7.5%.|
|Minimum tenure for liquidity||3-year lock-in, after which you can redeem or reinvest||Lock in is 5 years, but you can extend it up to 10 years|
|Tax benefits||10% LTCG tax on the profit over and above 1 lakhs||As per your tax slab|
|Risks||Equity linked so there are some risks even though they are well distributed||Your capital is safe and returns as per slab.|
|Online option||Available for lump sum and SIP||Not all banks offer an online options|
Before investing, people consider age, investment horizon, and risk appetite. People who want dual benefits of wealth accumilation and tax benefits opt for an ELSS. Long-term and safe investors prefer fixed deposits, as they have low risks and guarantee returns. In short, you must always choose an investment scheme based on your financial goals and risk profile.