Suggestion on Mutual Fund Sip investment plan and PPF

Your investment choice should be governed by your risk tolerance, financial goals and investment horizon.

1. If your risk tolerance level is high and you have a long investment horizon, then Equity Linked Savings Schemes, commonly known as Tax Saver funds are the ideal investment options for Section 80C tax saving. Top ELSS funds have given around 30% annualized returns in the last 3 years and over 20% annualized returns in the last 10 years. No other investment option in Section 80C can match the returns of ELSS funds over a long investment horizon. Returns of ELSS funds are tax free in the hands of the investor. You can read about the top ELSS funds in our article, FY 2014 -2015 Tax Planning: The top 6 Equity Linked Saving Schemes.

2. If your risk tolerance is low, you can opt for National Savings Certificates. The interest rate for the 5 year and 10 year NSC issues are 8.5% and 8.8% respectively. Please note that the returns of NSC is taxable as per your tax rate. However, the accrued interest on an annual basis (except the final year) qualifies for tax saving under Section 80C, subject to the overall 80C limit.

3. You can also opt for Voluntary Provident fund. The interest rate is 8.5% and the return is tax free, but the liquidity of VPF is low since you cannot access the investment till retirement, except in some special circumstances.

4. If you have a home loan, then the principal component of your home loan EMI qualifies for tax saving. Additionally, if you make principal prepayments, then it also qualifies for 80C benefits. Further if you make principal prepayments on a regular basis, you can significantly reduce the interest burden of your home loan.

Depending on your financial situation, risk tolerance and financial goals, you can opt for any of these three or even a combination of these three options.