The introduction or rather reintroduction of long term capital gains taxes on equity mutual funds including ELSS (equity linked savings schemes) has made some novice investors a bit jittery. A lot has already been written and said about long term equity gains taxes on equity schemes. In short, considering the potentially high returns, Rs. 1 lakh annual gains taxation threshold and the grandfathering of returns till 31^st January 2018, equity schemes still hold the edge over competing investments. This also holds true for ELSS funds that investors choose for making tax saving investments. In case you are still on the fence regarding if there are any benefits of opting for tax saving mutual funds over traditional tax saving investments, the following are seven top reasons to choose ELSS.

1. Short Lock-in:

All tax-saving investments feature a lock-in period which currently varies from 3 years to 15 years. During this lock-in period you are not allowed to redeem your investment or make withdrawals except for some specific emergencies. As per existing rules, among the available tax saver investments in India, ELSS i.e. tax saver mutual funds have the shortest lock-in period of 3 years. This allows you the ability to shift to a different investment option within a relatively shorter period of time in case your chosen investment is not performing as per your expectations. Obviously in case of tax saver schemes with longer lock-in period, you do not receive the same flexibility.

2. Flexibility to Choose Investment tenure:

The flexibility of mutual fund schemes is unmatched even in case of tax saver investments as you have the option to choose your investment tenure beyond the 3 year lock-in. In case of most other tax saving investments you have to invest in blocks of 5 years or more beyond the initial lock-in period. This is not the case with ELSS schemes – you can stay invested for a day or even for decades after completion of the initial three year lock-in period. Typically staying invested in a top rated ELSS mutual fund for a longer period offers you greater compounding benefits.

3. Potentially Higher Market Linked Returns:

ELSS are market-linked diversified equity schemes, this gives them an edge over fixed return investments that offer tax benefits. The main problem that fixed rate tax saving schemes such as PPF have is that inflation reduces the actual returns generated by these investments over time. Fortunately being market-linked, tax saver mutual funds can provide potentially higher returns that can beat the adverse impact of inflation in the long term. This is the key reason why many individuals who make investments with the intention of planning for retirement or other future expenses have moved away from old school options such as fixed deposits and PPF to mutual funds and ELSS instead.

4. Compounding Benefit:

Compounding is what makes today’s investments more valuable in the long term and equity linked savings schemes can potentially deliver superior compounding benefit when compared to traditional tax saving investments. This is because the returns offered by traditional instruments such as tax saver fixed deposits and PPF tend to offer a lower rate of return than the average ELSS. This causes the compounding of the initial investments to grow slowly and reduces the overall benefit of compounding for you in the long term. In case of mutual funds such as ELSS, the potential returns being higher, these compounding benefits tend to add up faster for investors. It must however be pointed out that ELSS returns do not have a fixed ROI, hence during some periods, returns will be considerably higher than during other periods with historic long term average returns of equity schemes recorded at 12% per annum.

5. Option of SIP Investment:

SIP or systematic investment plans are akin to recurring deposits for ELSS investments and currently this route has emerged as the key driver of equity mutual fund investments in India. For starters, a SIP allows you to invest over the long term in small installments, as low as Rs. 100 per month, so you do not need to worry regarding upsetting your monthly or annual budget. SIP is also suitable for individuals who tend to have trouble saving as the amount gets debited automatically from your bank account. This way you will end up saving money for the future instead of spending it all. Last but not the least, SIP also provides the benefit of rupee cost averaging to investors. The NAV of an ELSS fund changes daily and investing via SIP eliminates the need for investors to time their entry into the market by providing an average value of units (rupee cost averaging) over the chosen investment tenure.

6. High Levels of Transparency:

Mutual fund houses i.e. asset management companies (AMC’s) who manage ELSS and other mutual fund schemes are regulated by SEBI (Securities and Exchange Board of India). As per SEBI guidelines, AMCs have to make periodic disclosures regarding key information of all schemes managed by them. Information provided through these mandatory disclosures include net asset value (NAV), assets under management (AUM), scheme returns over different periods, total expense ratio (TER), current asset allocation, etc. While some of these have to be reported daily, others need to be reported as per a monthly or quarterly schedule. As of now, no tax saver investment in India features a higher degree of transparency than ELSS. Hence tax saver mutual funds ensure that you always have the latest information regarding the status of your investments.

7. Ease of Investment:

The advent of Internet and related technology has significantly eased the pains related to making tax saving investments. However many traditional tax saving schemes such as PPF still require you to physically queue up at a designated bank or post office so that you can subscribe to the chosen instruments. Not in case of tax saver mutual funds. After having adopted Aadhaar-based eKYC or as a KYC complaint investor, the industry, as a whole, allows investors to start investing online without having to leave the comfort of their home or office.

While planning for the Retirement one should keep in mind that what are the options available to an investor at the age of Retirement for the regular inflows or annuity. That might be Reverse Mortgage, Insurance Plans, SWP, etc.

Let’s check what is Reverse Mortgage, options available, their advantages & disadvantages in this post.

What is a reverse mortgage?

In a home loan scheme, you take a loan from the bank, buy a house with that loan and pay back the loan along with interest to the bank.

In case of a reverse mortgage scheme, the homeowner receives money in installments equivalent to the value of the loan.

The bank will have the right to sell the property after the borrower passes away to recover the loan If the sale proceeds are in excess of the sum due to the bank, the excess is returned to the legal heirs. The borrower also has the option to repay the loan earlier as well.

A reverse mortgage allows a person to get a regular cash flow to take care of financial needs. The money can be received in a lump sum and/or regular payouts.

What are the options available for a person applying for a reverse mortgage?

There are two options available —Reverse Mortgage Loan(RML) and Reverse Mortgage Loan-enabled Annuity (RMLeA).

In the case of RML, you will either get a lump sum amount or amount in installments, depending on the frequency selected.

In the case of RMLeA, the loan amount is given to an insurance company. The insurance company works with the corpus such that it gives you an annuity for the rest of your life. This is like a pension.

Ask Yourself – Is 1 Crore Enough for Retirement?

Who can choose to go for a reverse mortgage?

Senior citizens who own a house can opt to go for a reverse mortgage. The house should have been bought by the borrower. It should not be inherited property. Senior citizens may not have a regular flow of income and reverse mortgage helps them to take care of living expenses.

How can I avail of a reverse mortgage?

The following conditions are required to be satisfied for a person to avail of a reverse mortgage –

• The person should be a senior citizen (age>60 years).
• The person should own a residential house.
• If the person is taking the loan jointly with the spouse, the spouse should be above 55 years old.
• The house can be owned individually by the person wanting the reverse mortgage or jointly with the spouse.
• You can apply for it through a bank or a financial institution. Fill in the application form and submit a copy of PAN card and registered will, details of the property and a list of legal heirs along with the form to the bank. The bank will assess the property and decide on the loan to be given. It usually gives loan up to 40%-60% of the value of the property. The bank will charge some fees related to the processing of the loan.
• SBI, LIC, PNB, Indian Bank, Andhra Bank, Dewan Housing Finance Limited are some of the organizations that offer a reverse mortgage.

What are the tax implications of a reverse mortgage?

There are no tax implications in case of a reverse mortgage. The amount received as a lump sum or as annuities are not liable to tax payments. If the property is sold before the reverse mortgage comes to an end, the relevant tax for capital gains is applicable.

What are the advantages and disadvantages of a reverse mortgage?

Reverse Mortgage looks like an attractive option. It is a good source of income for retirees. It uses the existing property to generate income.

The bank can recover the loan only after the death of the borrower or when the property is sold. There is no fixed tenure for repayment of a loan.

Reverse Mortgages are not popular in India. Many people have a sentimental attachment to their property and do not want to sell it off for a regular income stream. They want to pass it on to their heirs.

The loan value given by banks for reverse mortgages is low. The owner has to ensure the upkeep of the property and pay all taxes and other dues related to the property. If this is not done, there can be foreclosure of loan or to prove that he/she can make their homeowner’s insurance, tax, and upkeep payments. If failed in keeping the taxes current and paying the insurance premium on time will result in foreclosure of the loan.

The product is not easy to understand nor well publicized. People are unaware of its features and stay away from it.

Should I go for a reverse mortgage?

A Reverse Mortgage is a great option for people who want to live in their house and at the same time earn an income but are not interested in giving the house to their heirs. It is good for people who have valuable property and not enough investments or savings to generate regular income for them.

But the documentation is a tedious process. There is not enough knowledge and information about a reverse mortgage in India. If as a retiree, you have a source of income but it falls a little short of what is needed, you can go for portfolio review or go for more tax-efficient investment products. The processing fees should be looked at and checked if it is not burning a hole in your pocket. If you have a big house, you might want to sell the property when the property market is good and you can invest the money in different investment products to get the most optimum returns. It may not be necessary that the bank fetches a good price for your property after your death. You can move into a smaller house where maintenance related efforts and costs may be lower and will work to your advantage.

Consider these factors before you make the final decision on a reverse mortgage.

After retirement, one may not have a regular income channel. But expenses will continue to be there. Some expenses might increase and some might decrease.  It is important to have an appropriate strategy to get a regular income during retirement.  It is important to manage money smartly so that one does not have financial woes in the retirement years. If one invests an appropriate amount as per the financial plan in MFs when he/she has a regular income, Reverse mortgage can be set up during the retirement years for regular income.

If you have any questions regarding Reverse Mortgage – feel free to ask in the comment section.