ELSS could be a win-win
The rising inflation takes a toll on living expenses and sharply erodes our disposable incomes. Add to this the tax burden and voila… you find your wallet size shrinking… So what is the holistic solution that helps you trim your tax outgo and also offers you higher (inflation-adjusted returns) albeit over a longer time-frame?
There are host of tax-saving avenues as enumerated in table 1 which offers tax savings under the Income Tax Act. These include traditional instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), etc., which are considered safe avenues however do not generate returns commensurate to meet one’s financial goals. Alternately, investors can park their funds in Equity-Linked Savings Schemes (ELSS) to save their tax outgo and accumulate returns over the long run .
- Tax-saving schemes which predominantly invest in a diversified portfolio of stocks
- There is a lock in period of three years
- ELSS funds becoming preferred tax-saving
- ELSS investments are allowed in Rs 500 and multiples of Rs. 500
- You can also invest through SIPs which will help instill a disciplined approach towards financial planning in investors
- Since the ELSS schemes invests in stocks, therefore Investments in ELSS are subject to market risk and hence, investors must consider age and risk appetite
Traditional instruments such as Public Provident Fund (PPF), National Savings Certificates (NSC) and Bank Fixed Deposits generates lower inflation-adjusted returns as compared to ELSS. ELSS has beaten these instruments by a much wider margin. Here, one should note that while equity is a risky asset class, volatility in returns tends to subside in the longer run.
Traditional instruments such as Public Provident Fund (PPF), National Savings Certificates (NSC) and Bank Fixed Deposits generates lower inflation-adjusted returns as compared to ELSS. ELSS has beaten these instruments by a much wider margin. Here, one should note that while equity is a risky asset class.
volatility in returns tends to subside in the longer runNote: Standard deviation calculated on daily rolling basis
ELSS category represented by CRISIL – AMFI ELSS Fund Performance Index
ELSS enables exposure to equities, which have historically proven their ability to generate better returns. The equity market benchmark S&P BSE Sensex has delivered 13% returns over a decade ended October 2015, compared with 8-10% yielded by tax-saving debt instruments. Better returns can help investors fulfil their financial objectives across different life stages, apart from reducing the tax outgo.
ELSS also helps investors save taxes on capital gains. Long term capital gains (on units held for 1 year or more) are completely exempt from tax, since the ELSS carries a three-year lock-period. Investors opting for the dividend plan can further enjoy tax-free dividend income.
ELSS funds help investors diversify their portfolio across stocks and lower the concentration risk. In addition, ELSS schemes are managed by professional fund managers who have the expertise and dedicated research teams tracking market developments.
While equity as an asset class is known to generate better return, it is also subject to volatile market conditions. One of the best ways to counter volatility is to opt for investments in ELSS funds via the systematic investment plan (SIP) route.
Choosing the SIP route makes investors more disciplined in financial planning and thus, helps them meet goals faster. It also allows investors to benefit from rupee-cost averaging i.e., you buy more units when the price is low and less when prices are high, thus averaging your cost of acquisition and beating market fluctuations. SIP negates the need to time the market and thus saves investors from going wrong. Investors should continue with their SIPs even when the scenario is are uncertain, given that markets are cyclical in nature and change the course on cues from several domestic and international factors.
Thus, in a nutshell, ELSS funds can be considered as an ideal tool for tax saving and wealth creation. Nevertheless, investors must make the proper choice of schemes. Yes, they do not offer guaranteed returns like the vanilla fixed income products, but being market-linked, they offer investors an opportunity to earn higher returns, albeit involving some element of risk. You may consult your financial advisor for details.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.