Investment Planning for child’s higher education involves a portfolio with high return earning instruments which are capable of serving long-term financial objectives. Mutual Funds are now considered one of the best investment options when it comes to earning higher returns over a longer period of time.
ELSS for Higher Education
If your investment objective is your child’s higher education, then you can park your money in equity funds to earn not just stable but higher returns. Equity Mutual Funds are known for beating inflation, especially education inflation, and earning good returns over the long term.
Besides this, if you are planning to not just invest but to save on income taxes as well, you can invest in Equity-linked Saving Schemes ( ELSS ). It is a kind of Mutual Fund scheme which predominantly invests in equity and equity-related instruments to generate high returns. Also, investments up to Rs.1.5 lakh in an ELSS are eligible for tax deductions under Section 80C of the IT Act.
Now, let us know more about the benefits of investing in ELSS for higher education purpose and what are the best ELSS available:
Best ELSS For Child’s Higher Education
Given below are top 10 ELSS which can be considered for investments for child’s education:
|Fund Name||AUM (Crores)||3- Year Returns||5- Year Returns|
|Axis Long Term Equity Fund||Rs.21,659||5.71%||6.21%|
|BOI AXA Tax Advantage Fund||Rs.280||3.91%||4.79%|
|Canara Robeco Equity Tax Saver Fund||Rs.1,036||3.31%||3.87%|
|Mirae Asset Tax Saver Fund||Rs.3,282||2.66%||–|
|Invesco India Tax Fund||Rs.1,028||2.05%||4.66%|
|BNP Paribas Long Term Equity Fund||Rs.463||1.91%||3.05%|
|LIC MF Tax Fund||Rs.272||1.65%||2.61%|
|IDBI Equity Advantage Fund||Rs.536||0.93%||2.78%|
|ABSL Tax Relief 96 Fund||Rs.10,073||0.48%||4.06%|
|Tata India Tax Saving Fund||Rs.2,060||0.13%||4.83%|
(The Funds in the table have been arranged according to their 3-Year returns as on 30-03-2020. Source: Value Research)
Features of ELSS Investments
- There is a lock-in period of 3 years in Equity Linked Saving Schemes for each SIP or lump sum amount invested, the lowest for a tax saving investment instrument
- Tax Benefits under Section 80C of the Income Tax Act, 1961
- ELSS can make 100% investments in Equity instruments
- The expense ratio associated with an ELSS plan for your child is a maximum 2.5%. Moreover, the cost can be further reduced if you have invested in the fund directly from the fund house
Benefits of Investing in ELSS for Child’s Higher Education
Here are some advantages of making investments in Equity Linked Saving Schemes for child’s education:
- High Returns: Mutual funds especially equity funds provide the highest return among all the investment instruments over the long term. Equity funds are capable of providing returns as high as 13%-15% if held for periods as long as 12-15 years.
- Tax Saving: By investing in ELSS, you are not just creating wealth but also saving taxes. ELSS allows you to save taxes, as investment upto ₹1.5 lakh in these schemes is eligible for tax exemption.
- Low-Investment Requirement: An investment in a mutual fund scheme can be initiated with an amount as low as Rs. 5000 in case of a lump sum investment/Rs.500 in case of a systematic investment plan (SIP). For instance, if you invest Rs. 5,000 monthly in a mutual fund scheme for a period of 15 years, you will have nearly Rs. 34 lakh at the time of maturity (expecting an annual rate of return of 15% without adjusting for inflation).
- SIP Option: Mutual fund allows the individuals to invest via systematic investment plan (SIP). SIP is a mode of investment which allows you to invest small amounts at periodic intervals to reap in the benefit of power of compounding.
- Diversified Portfolio: A mutual fund scheme holds a host of investments spread across market capitalisations and industries in its portfolio. By investing in a mutual fund scheme, you get the access to this diversified portfolio at a very nominal cost (that is the investment amount). Diversified portfolio helps in earning high returns as well as in distributing the market risk.
- Professional Management of Funds: A mutual fund scheme is managed by a team of professionals who are led by an experienced fund manager. The professional management of funds helps a mutual fund scheme in staying relevant in the times of changing market and economic conditions.
- Disciplined Investments: ELSS comes with a minimum lock-in period of 3 years which establishes discipline of investments among the investors. Consequently, the fund managers do not undergo pressure for redemption when during bearish market situations
- Power of Compounding: It helps you to earn returns not only on your principal investment but also on the returns generated from that investment, thereby increasing your wealth. You can read more about it here.
Tax Treatment on ELSS
ELSS is the only Mutual Fund type which offers to save taxes as well. Investments up to Rs.1.5 lakh in ELSS are exempted for income taxes under the IT Act in that financial year. Here is an example of tax treatment under ELSS:
For instance, you have invested Rs.2,00,000 in a financial year in Axis Long Term Equity Fund. Maximum Rs.1.5 lakh of the invested amount are eligible for deductions thereby reducing your taxable income in that financial year. However, it is to be kept in mind that this is applicable only if you do not have any other tax-saving investment for deduction under Section 80C of the IT Act.
Moreover, returns from ELSS are taxed like that from any other equity mutual fund scheme. But, since the units can’t be redeemed before 3 years of investment, only Long Term Capital Gains Tax (LTCG) of 10% on gains above Rs.1 lakh will be levied at redemption.
Related Article: What is Capital Gains Tax?
Example: An investor has made a capital gain of Rs. 1.5 lakh on investment in this scheme at the time of redemption, LTCG of 10% would be levied on Rs. 50,000 in that financial year. Rs. 1Lakh in capital gains is exempted from taxation. The payable tax would be Rs. 5,000.
How to Invest in ELSS Funds?
There are different methods through which one can invest in ELSS:
- Offline mode– Visiting the nearest branch office of the fund house and investing in the desired scheme. You must carry all the required documents such as Identity Proof, Address Proof, Cancelled Cheque, Passport size photos, PAN Card and KYC Documents handy. You can also invest offline through a broker. However, this would then be a regular fund and not a direct fund. Think of it like a charge brokerage which gets deducted from the total investment amount
- Online Portal– If you want a hassle free mode of investing with no commissions and brokerage, you can choose websites like Paisabazaar.com which allow the investors to compare more than 1,700 funds at one platform instead of visiting the website of each AMC and then searching for numerous funds. You can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
To know more about the investment procedure for mutual funds, visit: How to invest in Mutual Funds?
Frequently Asked Questions
Q.1: What are the best equity funds for children’s higher education for 15 years?
Ans: There are many mutual funds available in the market and choosing the right fund involves proper speculation and analysis of different factors such as risk, etc. Since you are willing to invest for 15 years, which is a long term investment, you can diversify your corpus in different multi-cap funds such as Birla SL Frontline Equity, Mirae Asset India Opportunity Fund or ELSS like Axis Long Term Equity Fund, if you want to save on taxes as well.
Q.2: What is the best investment for a child?
Ans: Since you are investing for a child, the purpose can be education or marriage etc. All of these are long-term investment objectives. For that purpose, you can consider investing in Mutual Funds as you will get to earn higher returns than other investment options such as Fixed Deposits etc. By investing in Mutual Funds for long-term, your investments will have sufficient time to generate satisfactory returns. Apart from this, you can also choose Public Provident Fund (PPF) or Small-saving schemes such as Sukanya Samriddhi Yojana for your child.
Q.3: Which ELSS fund is best for a girl child?
Ans: Axis Long Term Equity Fund and Mirae Asset Tax Saver fund are performing well in the market as per the returns accrued in the last 3 years. However, if you want to invest only for your girl child, you can choose an investment scheme such as Sukanya Samriddhi Yojana which is designed to benefit the girl child and gives decent returns too.
Q.4: How can I save tax and plan for my 1-year old child’s higher education?
Ans: When your objective is not just to save for a child’s higher education but also to save on taxes, you can definitely choose to invest in a good ELSS. investments up to Rs.1.5 lakh are eligible for deductions under Section 80C of the Income Tax Act.
Q.5: Should you sell your ELSS after the 3-year lock-in is over?
Ans: Whether you want to sell your ELSS or continue the investments, it is completely your own choice. However, it is suggested that one should keep the investments active for as long as you can to generate higher returns. ELSS investments should be kept invested for at least 5 to 7 years to enjoy maximum benefits.