Why You Should Reduce Your PPF Exposure and Invest More In ELSS
Public Provident Fund (PPF) has been the favorite investment option for decades. These investments are backed by government security making them a zero-risk instrument that allows tax savings.
These were the times when mutual funds were rather new to the market and the then earning generation was rather risk-averse and skeptical about this new instrument. However, today mutual funds have a proven track- record of outperforming a majority of the traditional investment instruments.
Equity-Linked Savings Scheme (ELSS) is adiverseequity mutual fund that, because of its tax-saving capability, outperforms other traditional tax-saving instruments such as PPF, National Savings Certificate (NSC), and others.
Public Provident Fund (PPF)
PPF is a debt instrument that earns fixed but guaranteed returns. All investments in PPF are exempt from your taxable income to a maximum of INR 1.5 lakh a year as per Section 80C of the Income Tax Act.
PPF earnings are between 8%-9% and this is considered an excellent earning potential for a debt instrument. Categorized as an Exempt-Exempt-Exempt (EEE) instrument, the earnings from PPF are also tax-exempt.
There is a maximum investment limit of INR 1.5 lakh per year in PPF. This clubbed with the lock-in period of 15 years makes it less desirable investment instrument, particularly if you are looking for faster wealth creation.
Equity-linked Savings Scheme (ELSS)
ELSS is an equity-based instrument as evident from the name. The pooled funds in these schemes are invested in a diversified portfolio of equities by qualified and highly efficient fund manager(s). This enables the ELSS investors to earn higher returns.
Just like the investments in PPF, ELSS fund investments are also eligible for a maximum of INR 1.5 lakh in tax exemption according to Section 80C of the Income Tax Act. There are various other eligible instruments for this exemption. Of the total investment in these instruments together, a maximum of INR 1.5 lakhmay be claimed for tax exemption as per Section 80C of the Income Tax Act.
When you invest in ELSS funds, you earn tax-free returns, irrespective of the amount ofthe earnings made. This aspect is particularly attractive because unlike the PPF there is no ceiling on the amount you may invest in ELSS.
In case of making an investment in ELSS, there is a three-year lock-in period, after which you can liquidate the investment. Moreover, the dividend and maturity earnings after the completion of the lock-in period are also entirely tax exempt.
The average earnings on an ELSS investment range between 15% to 18%.Thus, it is better to invest in ELSS funds than to lock away the funds in PPF. Below detailed is the summary that illustrates the same.
|Maximum permissible amount||No limit||INR 1.5 lakh|
|Lock-in period||3 years||15 years from the first contribution|
|Systematic Investment Plan (SIP) compatible||Yes||No|
The fact that you can invest in ELSS through a SIP makes it an even more lucrative investment as it eases the burden on your wallet by allowing you to make smaller and periodic investments on a regular basis and thereby encourages financial discipline.These small periodic investments also provide for marginally increased earnings as compared to a single lumpsum investment at the year-end.
That said, if you choose to invest in ELSS funds, you must carry out a comprehensive technical research to evaluate the various tax-saving funds offered by different asset management companies. However, you may neither have the skills nor the experience required for such technical analysis.
The ARQ investment engine, a proprietary productin Angel Wealth’s mobile application is the ideal tool to help you carry out this research. It does a detailed analysis of all the available funds and provides recommendations that are free of human interference or bias.
Whether looking for tax saving options or simply seeking wealth-accumulating options, you need to carry out detailed research and gain a clear understanding of your own finances and budgeting. In order to do the same, you need to plan well in advance and use technologically advanced tools such as ARQ to access available mutual fund investment options and choose the right one that aptly fulfills your financial needs.
The ARQ investment engine uses quants and algorithms to analyze over a billion data points and provide the best recommendations. Your risk profile and investment goals are matched with the right investment instrument to ensure maximum returns on your investments.
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