Categories: Mutual Funds

DO NOT invest in ELSS. Here’s Why!

With the last few months left of the current financial year, many of you would have started looking at your tax saving options in order to minimise your tax outflow. You must have already spoken to your erstwhile insurance agent or your post office expert or contemplating another bank FD this year as well.

Same story, every year and yes, you must have already built a large portfolio for yourself by investing every year prudently. So what if the portfolio is not tax efficient, it must be proving you guaranteed returns! So what if the guaranteed returns are too less to cover inflation, it must be providing you the peace of mind that you were looking for!

Even this year, you can merrily invest in any of the fixed income debt instruments but do so only if you do not want inflation-beating returns on your investments.

But, what if you are someone who is looking at 80C investments not just for tax-savings, but also for aligning your long-term investment goals such as retirement planning or buying a house? Do you really think that such investments where the real rate of return negligible will help you achieve your long-term goals? Tax planning is not only about saving taxes but also an opportunity for wealth creation to achieve future financial goals. If you are genuinely looking capital appreciation then why not look at ELSS as an investment option where the returns have outperformed all the other investment options by a huge margin.

What are ELSS funds?

ELSS or equity linked savings schemes are tax saving mutual fund investments which invest majority of their corpus in equity and equity related instruments. ELSS is the only option under Section 80C which allows you to reap the benefits of the returns generated by the equity markets and at the same time offer complete tax shield at the lowest cost possible.

Here are some of the important points which you should consider while investing in ELSS:

Attractive returns: ELSS funds primarily invest in equities and equity-related instruments. Though equity returns are extremely volatile in short-term, in the long run, equities can provide superior returns. An investor with a long-term investment horizon can expect annualized returns between 12 to 15%.

Let me give you an example. Rs 1.5 lakhs mandatory 80C investments, done year after year for 25 years can create a portfolio of ~Rs 3.2 CR at 15% return and only ~Rs 1.1 CR at 8% ROI, which is an average return for a fixed income debt product.

However, if 15% annualized returns do not attract you, then this is not the right investment for you!

Lowest lock-in period: As compared to other tax saving investment options under Section 80C of the Income Tax Act, 1961 ELSS have the lowest lock-in period of 3 years. In all the other alternatives the lock-in period varies from anywhere between 5 to 15 years with the restriction on withdrawals. ELSS, on the other hand, can be withdrawn fully after 3 years.

However, if you want to keep your investments locked in for a longer tenure, then this is not the right investment for you!

Tax Efficiency: From a taxation perspective, ELSS enjoys the triple tax advantage. The amount invested in ELSS up to the limit of Rs. 1.5 lakh is exempt under Section 80C. ELSS funds are equity oriented and dividend income and the long-term capital gains on them are exempt from tax thus making the maturity proceeds entirely tax-free for an investor.

Whereas, in case of tax-saving FDs, post office FDs and NSC the interest earned is taxable as per your income tax slab; investments in NPS and pension plans are taxed at the time of maturity. Insurance is also an EEE (exempt-exempt-exempt) investment but it is not a pure investment product. Though PPF enjoys the EEE benefit like ELSS, investments in PPF are extremely illiquid with the highest lock-in period.

So, you may consider other investment options only if tax efficiency is not something that you need to consider!

Opportunity for wealth creation: Equity markets though volatile in the short run, historically, it is the best asset class for wealth creation. ELSS funds are professionally managed which offer tax advantage and opportunity to participate in the equity markets.

Yes equity market has market risks but it doesn’t have the other risks like interest rate risk, reinvestment risk, liquidity risk, etc. Thus, if you are ok with the short-term volatility of equity markets and looking for long-term wealth you can invest Rs. 1.5 lakh in ELSS every year without batting an eyelid.

And if you have any more doubts or are still convinced that ELSS is not a good investment option, then let us know! We are yet to find the most convincing reason to not invest in ELSS. Do let us know, we are awaiting your feedback!

Chitra Grace Marion

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