How many tax saving schemes do you need?

Financial Planners

“Which ELSS scheme is the best for me to invest in this year?” This is a question that confronts many financial planners and distributors as each calendar year begins and each fiscal year ends. ELSS stands for Equity-Linked Saving Schemes. These tax-saving Mutual Fund (MF) schemes are entitled to an income tax deduction of up to INR 1,500,000 under Section 80C.

As a result, new ELSS schemes are added to the portfolio each year. Over the years, this has led to an excessive accumulation of these tax-saving schemes in many equity mutual fund portfolios, requiring them to be consolidated.

But if the main objective is tax saving, the question is how many tax saving schemes are needed.

For starters, ELSS is eligible for deductions under section 80C such as public provident fund, employee provident fund, children’s tuition fees, mortgage repayment, life insurance premiums, Sukanya Samuridi Yojana, National Savings Certificate, etc. Compete with other means. .

A small savings scheme with tax credits is the strength of most conservative investors, but aggressive investors prefer ELSS, which offers a diversified portfolio of equities and comes with a three-year lock-in. In the long run, ELSS tends to do better than most other tax saving measures. For example, according to Value Research, in his five-year period ending April 18, 2023, tax-saving schemes earned an average return of 9.88%.

First-time tax deductible investors often enter the mutual fund arena by investing in ELSS. Since this is a stock scheme, we prefer to diversify across the scheme. As a result, many investors invest in tax-saving schemes only for the first few years, but some end up investing too much as the years go by.

Also Read: 4 Tax Saving Tools for Your Investment Portfolio

Amol Joshi, founder of Mumbai-based Plan Rupee Investment Services, said:

Most of the time, the pursuit of short-term performance gets investors in trouble.

choose one and stick to it

Most financial planners recommend investing in one ELSS scheme and keep adding more each year. “If an investor buys multiple funds in the same ELSS category of his, most of his ELSS funds will only have duplication because on average he holds 60-70% of his funds in large caps. ‘Galbridge, an investment advisory firm.

Also Read: New Tax System vs. Old Tax System – Deductions and Exemptions Allowed in Both Tax Systems

Joshi prefers to select schemes based on long-term performance, along with other factors such as fund positioning and market capitalization bias. Fans of passively managed portfolios may also consider passively managed ELSS.

See our curated list of well-managed ELSS schemes

Pankaj Mathpal, founder of Mumbai-based Optima Money Managers, said: However, new investors who may not have access to research, or those keen on passive investing, should seek out passively managed tax-saving funds. “

Should it be integrated?

When you have too many ELSSs in your portfolio, consolidation thoughts come to mind. But don’t jump guns. Conduct a portfolio review. Seek professional help if necessary. Treat all his ELSS investments like any other equity fund. If the scheme works, compound the money. He doesn’t have to sell ELSS just because the unit has passed the lock-in period. Sell ​​only those that perform poorly.

Also Read: NPS Tier-II Investment Accounts: A Favorable Option, But Lack of Capital Gains Tax Clarity Causes Flooding

“Identify funds that have consistently underperformed their benchmarks and peers for at least three years. You can also choose to stop SIP as soon as these funds are identified,” Nayak said. Sell ​​units if they are not locked in.

After tax considerations, reinvest the proceeds into other equity funds in your portfolio. This step is very important. There are too many small folios, and selling your holdings under the guise of consolidation will redeem most of your stock portfolio. If you don’t reinvest, you miss out on compounding opportunities.

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