ELSS versus fixed income tax saving investments - which one is safer to invest?
December, 30th 2014
IT professional. It is that time of the year again when he must make some investments to save tax under Section 80C. He has traditionally been using the PPF, NSC and the 5-year bank deposit as investment options. He looks at this exercise as a year-end ritual and is content that his investments are safe and uncomplicated. He has heard about tax saving mutual funds from his friends. Should he include them in his plans?
Sudesh should make his choices based on his own goals. He may use the tax saving investments for his long-term needs such as retirement; or he may take out the money after a few years, when the lock-in period ends. If he is primarily saving for the short term, like for about five years, investments that preserve the capital and earn interest are a good choice for him. NSC and bank deposits meet that need.
However, if he is saving for the long term, he will need an element of growth in his investments. Fixed income products such as bank deposits or NSC maintain the invested principal at the same level. But Sudesh will need the invested capital to grow over time, in order to fight inflation, which is an important risk with long-term goals. For example, if he is using the Section 80C benefits to build a corpus for his retirement, he will need the money to appreciate in value over time. He would thus need equity investments to meet this need.
Mutual fund tax saving schemes represent a diversified equity portfolio, that is eligible for Section 80C benefits. They offer long-term growth, but can be risky in the short-term. Therefore, Sudesh will be better off adding some tax saving equity funds to his investments, if his goals are long-term in nature.
The overall risk of his investments would be cushioned by the PPF and NSC that he already has, while equity would provide some growth, which he may need. Sudesh's choices will depend primarily on his needs and time horizon.