Do you ever find yourself lost in conversations about mutual funds and tax-saving schemes? With so many options out there, where does one even begin?
If you’ve just begun your financial planning journey, chances are you’ve come across ELSS (Equity Linked Savings Scheme). It’s a popular choice for young professionals like us looking to invest in the market while also enjoying the perks of income tax. But is it the only smart option out there? Let’s find out.
First, what is ELSS?
An ELSS fund is a diversified equity mutual fund that comes with a tax-saving advantage. It invests a major portion of its corpus into equity or equity-related instruments. It’s usually a go-to investment for those who want market exposure and want to claim deductions under Section 80C of the Income Tax Act.
What to Consider Before Investing in ELSS:
1. Market Risks: ELSS investments are subject to market ups and downs. While they have historically provided good returns, they do come with risks.
2. Lock-in Period: Unlike open-ended mutual funds, ELSS has a mandatory three-year lock-in period. That means no early withdrawals.
3. Post-lock-in Choices: Once the three years are up, you’ll need to decide whether to stay invested, redeem your funds, or reinvest elsewhere.
If you’re comfortable with market fluctuations, ELSS is a solid option. According to the Association of Mutual Funds in India, ELSS funds have seen ₹2,030 crore in outflows since April 2024, with the biggest drop of ₹637 crore in July. This might suggest that some investors are losing confidence or looking at other investment options. Also, returns from ELSS funds have ranged from 0.88% to 7.16% on average since April 2024. This shows that the returns can be quite different from one fund to another. Some funds are performing well, while others aren't.
While ELSS remains a strong choice for tax-saving investments, you might want to look at an option that offers an additional layer of financial protection while growing your money.
The best of both worlds
ULIP (Unit Linked Insurance Plan) is a unique mixed bag- combining wealth creation with financial security. Instead of solely focusing on market-linked returns, ULIP offers the added benefit of life insurance.
ULIPs allow investors to allocate their money across different asset classes, including equity and debt funds. This flexibility can help you balance risk while ensuring long-term wealth accumulation. Moreover, they come with the added advantage of life insurance coverage, providing financial security for your loved ones while your investments continue to grow.
HDFC Life Click 2 Invest, for instance, is a great ULIP to invest in. Here are some of its features:
Get fund value at maturity or in periodical instalments based on your needs.
You can make partial withdrawals from funds to meet financial emergencies, if any.
Flexibility to save regularly, for limited period of 5, 6, 7, 8, 9, and 10 years or pay once under Single Pay.
Rather than choosing between ELSS and ULIPs, you should benefit from incorporating both into your portfolios. ELSS helps in gaining market exposure with a relatively shorter lock-in period, making it a solid tax-saving instrument. Meanwhile, ULIPs offer a more structured way to build wealth over time, making them an excellent choice for long-term financial security.
At the end of the day, financial planning is about making wealth smartly. So why not explore your options and invest with a strategy that suits your life goals?