For years together, tax payers can claim deduction in income under section 80(c) of Income Tax Act. Many products are available within that namely Public Provident Fund (Commonly known as PPF), ELSS mutual funds, National Savings certificate (NSC), and Insurance products.
Tax Saver MFs or Equity Linked Savings Schemes are mutual funds which invest in Equity for a period of 3 years. The funds are locked in for 3 years there after one can sell them and take the money back in one’s bank account. The reality today is that larger public invests in PPF due to an age old habit of savings. For some reason people look at it like the life saver fund. Many people, who I have interacted with, say that "Kuch nahi toh PPF kaam aayega budhape mein!" (If nothing then the PPF will be my savior at old age).
This emotional feeling of security is deeply rooted in our blood and DNA as our forefathers always had the habit of keeping money secured, hidden, stored for a dooms day. Those times were different and it was needed. Years of traditions have done this and thats why people are more comfortable doing this. Second reason for PPF is social influence of friends and family. My Grandfather used to do, my father did it so even I will do it Dont want to stop that tradition. Tax payers tend to miss the major factor that ultimately money stored for a bad day will always be helpful if it is more and not less.
Last many years study of PPF vs ELSS has been done and it is a clear cut indication that Equity out performs fixed returns over long periods. Only countries which have undergone very large asset bubbles have long periods of bad markets. The biggest reason for shying away from ELSS is that you can see its value daily going up and down. Imagine seeing the value of your house go up and down daily, or the value of gold ornaments go up and down daily. It would be catastrophic. Many won’t be able to bear the tension of fluctuations in their wealth and will end up putting all money in bank accounts. But the fact is that every asset has its ups and downs.
One should invest in ELSS with a 15 year perspective just like PPF and see the magic it does. The below graph shows the value of ELSS vs PPF. Imagine you were not aware about the value of your ELSS and you simply invest today to see its value after 15 years. Even in the worst 15 year period ELSS has given 3 Times more returns than PPF. Imagine having 3 times the money that you are going to have at your retirement. You dont need any other retirement planning. Its that simple.
The best retirement plan and the most tax efficient plan for any tax payer would be to invest in ELSS and stay invested for 15 years. Dont see the value dont bother to even predict it’s up and down move and simply ride along. Invest today and you wont regret after 15 years. For last 15 years you have invested directly into PPF, just try ELSS for next 15 years you wont regret. All the best.
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