By Prashant Mahesh, ET Bureau | 22 Nov, 2013, 05.55AM IST | Economic Times

Investors are wary of investing in tax-saving mutual funds (equity-linked savings schemes or ELSS in mutual fund parlance) this tax-planning season, say financial advisors. The abysmal performance of these schemes in the past three years and the current higher level of the market are cited as the reasons for investor disinterest.

According to Value Research, a mutual fund tracking entity, ELSS funds, as a category, have given a mere 0.33% returns in the last three years. With the tax ..

Investors can avail of a tax deduction of up to Rs 1 lakh under Section 80C by investing in a host of options like ELSS, tax-saving 5-year bank fixed deposits, the Public Provident Fund (PPF) or National Savings Certificate (NSC), among others.

“Investors, who invested in ELSS three years ago, are disappointed with lower returns. Clearly, they are not keen to invest in tax-saving mutual funds again and they prefer to invest in either PPF or tax saving bank deposits,” says Abhishek Gupta.

“Since investors have not made money for three years, they have turned risk averse, and want to protect capital,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services. That is the main reason why many investors would flock to PPF or tax-saving bank deposits.

Invest as per asset allocation: However, experts frown upon such “random” tax-planning exercise. They argue that investors should consider tax planning as part of their overall financial plan and choose products accordingly. They say picking tax planning instruments on the basis of past performance alone won’t help one reach the right conclusions.

“Make a financial plan based on your earnings, liabilities and goals. This financial plan will tell you how much money would go into various assets like equity, debt or gold. Some part of the equity portion of this plan could go into ELSS,” says Mukund Seshadri, founder, MSV Financial Planners. Advocates of ELSS also claim that it is the right time to get into stocks due to attractive valuations.

“The Sensex trades at a P/E of 18 times, making valuations attractive and leaving scope for appreciation over a 3-5-year period,” says Rupesh Bhansali, head (distribution), GEPL Capital. Experts also say that investors should also try to find out the details of the product they are investing. For example, consider the case of these disenchanted investors opting for PPF or 5-year bank deposits.

Chances are that most of them haven’t thought about the different lock-in periods in these options. “If you have a time-frame of five years, opt for tax-saving bank deposits. Opt for PPF only if you can wait for 15 years,” says Abhishek Gupta.

Sure, you can withdraw from PPF after five years, but for some specific purposes only. Also, you have to keep your PPF account alive by investing a minimum ofRs 500 every year. Currently, a tax-saving deposit in SBI for five years will give you an interest rate of 9%, while PPF gives you 8.7%.

However, financial planners suggest you keep tax treatment in mind while making these investments, as interest income is taxed differently. “Interest earned from PPF is tax free, whereas interest income from bank FDs and NSCs are taxable. Hence, if you are in the 30% tax bracket, PPF may be a better investment from a tax perspective,” says Harshvardhan Roongta, chief financial planner, Roongta Securities.

Source : http://goo.gl/uLSu4X