It’s that time of the year where many of you may be exploring some tax-saving investment options. Section 80C of the Income Tax Act, 1961 provides a number of tax-saving investment avenues for both, risk takers as well as risk-averse investors, to save tax up to a sum of Rs 1.50 lakh vide a deduction.
If you are willing to take some calculated risk, an Equity Linked Savings Scheme or ELSS is a promising option.
What is Equity Linked Savings Scheme?
Equity Linked Savings Scheme or ELSS, is a diversified equity mutual fund providing tax saving benefit under Section 80C. Thus, an ELSS scheme is also known as a tax saving fund.
A distinctive feature about ELSS is that compared to the other open-ended diversified equity mutual funds, investment in ELSS is subject to a compulsory lock-in period of three years. Lock-in means you cannot redeem your investments before three years from the date of your investment. However, this is the lowest lock-in period amongst all the other tax-saving avenues.
Where does an ELSS invest?
Being an equity mutual fund scheme, ELSS invests a predominant portion of its net assets in equity and equity-related instruments. Most Equity Linked Savings Schemes hold a diversified portfolio and usually are market-cap and sector agnostic. Meaning, normally they do not have a skew towards any particular market capitalisation segment (large-cap, mid-cap, and small-cap) or a sector.
Further, the investment style may be of any genre, i.e. an ELSS could follow either the growth style or value style or a combination of both, depending on its investment mandate and strategy.
Why invest in ELSS?
If you are looking at long-term wealth creation, equity as an asset class has proven its worth.
Table: Report card of ELSS vis-à-vis the benchmarks
|Particulars||Absolute (%)||CAGR (%)|
| ||6 Months ||1 Year ||2 Years ||3 Years ||5 Years |
|ELSS Category Average||-9.9||-5.3||7.7||15.9||16.0|
|Category: Benchmark || || || || || |
|NIFTY 500 - TRI||-9.8||-2.6||9.1||16.6||14.5|
|S&P BSE 200 - TRI||-9.0||0.1||10.1||17.0||14.5|
|S&P BSE 500 - TRI||-9.9||-2.5||9.2||16.8||14.5|
- This table is for illustration purpose only based on past performance.
- Past performance is not an indicator of future returns.
- Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.
- Speak to your investment advisor for further assistance before investing.
The table above shows how ELSS schemes have on an average, fared compared to certain benchmark indices. A number of ELSS, have successfully created wealth (clocking double-digit returns) for investors outperforming their respective benchmark indices over longer time frames. Now, while past performance is not indicative of future returns, it displays the return potential of investing in ELSS and equity as an asset class, in general.
While there is some risk involved when you invest in ELSS, if you select the worthy ones in the endeavour to maximise tax-saving and create wealth, it can help you clock efficient risk-adjusted returns and probably even counter inflation. The returns generated by some ELSS reflects that not only are they a worthy option for tax planning, but can even help you meet your financial goals.
When you pick ELSS for tax-saving, make sure you buy the best ones with a consistent performance track record and from a fund house following robust investment processes. Want to find the best ELSS within 5 minutes? Click here.
How to invest in ELSS?
When you invest in ELSS, make sure you have an investment time horizon of at least 3-5 years.
You can invest the entire amount at one go (as a lump sum investment) or via a Systematic Investment Plan (SIP - a mode of investing in mutual funds in a piecemeal manner). In case you opt for the latter, do note that each SIP instalment will be subject to a three-year lock-in period.
But to mitigate the shocks of volatility in the equity markets, SIP is a worthy route that provides the benefit of rupee-cost averaging and compounding. In the long-term to create wealth and accomplish your envisioned financial goals, a SIP in ELSS can prove to be a worthwhile proposition. So, effectively SIP-ping into ELSS can serve a dual purpose: tax planning as well as financial goal planning.
The minimum application amount for most ELSS is as little as Rs 500 with no upper limit. However, only a sum up to Rs 1.50 lakh is eligible for deduction under Section 80C.
Go ahead and consider ELSS for your tax planning this year. And as a responsible investor, remember to compare returns-to-risk when you select ELSS for your portfolio and be a successful investor.
Happy Tax Planning and Investing!
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.