Do not use ELSS mutual funds to save tax in the last minute!

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 12 Comments

Published: February 24, 2015 at 2:45 pm

Last Updated on April 18, 2016

Thanks to the ‘bull run’, ELSS mutual funds are projected as a ‘good’ last minute tax savings instrument. If you are thinking about tax deductions only now, do not use ELSS mutual funds.

Last minute tax-savers are not interested in preaching: how you should integrate tax planning with goal planning, plan for it at the start of the financial year and preferably set it in auto-pilot mode in the right direction. So let me say no more.

If you are looking for tax-saving instruments at the last minute, this is what I think you should do.

Tax savings instruments (80C) can classified into two:

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    • instruments in which gains are tax free. Example: PPF, ELSS mutual funds, life insurance policies (except term life insurance)
    • instruments in which gains are taxable. Example. Tax saving FDs and NSC

    Obviously, you would like to choose choose instruments in which gains are tax-free.

    However, beware of the choices that exist within this category.

    Stay away from all insurance policies (endowment, money-back, ulips etc.).  It is like a bad marriage from which you cannot get out unhurt.  Want to know why? Read: Here is why you should not mix insurance and investment

    So why not ELSS mutual funds then?

    People who have already invested in mutual funds (equity or debt), can afford to use ELSS funds as a last minute tax saving instrument.

    Those who to wish to begin mutual funds investing with a lump sum purchase of ELSS fund units at the last minute, must think again.

    They should ask themselves,

    •  Why am I considering ELSS mutual funds? Is it because someone I know got good returns from them? Is it because the stock market is ‘doing well’? Is it because a distributor is urging me to buy one?
    • Do I understand equity as an asset class? Do I understand that I could lose my principal? Can I stomach the ups and downs of the market?
    • Do I understand why an investor should have equity exposure?
    • What am I going to do with investment in future? What about next financial year? Will I invest in ELSS again?

    Irrespective of your answer, if you are a first time mf investor, stay away from ELSS funds at this time of the year.

    Open a PPF account and invest whatever amount you need to there.  That is your ideal last minute tax savings product.

    Come April, if you are still interested in equity, open a SIP in ELSS funds (yes, yes I have spoken against this but this would at least avoid last minute scurrying.) and proportionately reduce your future investment in PPF.

    Do not buy a product you do not understand. Do not use ELSS mutual funds to save tax in the last minute!

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