Save taxes, earn higher returns with ELSS

Soon after coming to power, the new government increased the section 80C limit under the Income Tax Act by Rs 50,000 per annum to Rs 1.5 lakh, and gave some other incentives to retail investors to save more. Under this section, people can enjoy exemptions among a host of heads including equity-linked savings schemes (ELSS) of mutual funds, provident fund contributions, repayment of home loan principal amount, purchase of life insurance, etc.In the Budget, the finance minister also increased PPF limit to Rs 1.5 lakh and home loan interest exemption to Rs 2 lakh.
“Among the options available to investors to save the extra Rs 50,000, ELSS is one of the favourite 80C instruments for many,” says Hardik R Joshi of Shrey Advisory Services, Anand. “A lock-in period of just three years, the chance for higher returns and the choice of various schemes from different fund houses make ELSS schemes popular. With the additional Rs 50,000 at the disposal of investors, we believe that if they keep the advantages that ELSS come with in mind, they can take dual advantage of tax savings and higher returns,” Joshi said.
What are ELSS? ELSS are equity mutual fund schemes which, at any given time, invest at least 65% of the total corpus in stocks. The balance could be invested in nonequity assets like debt, money market instruments, cash and cash-equivalent.
According to investment advisers, ELSS derive their power from being marketlinked, which also makes it unique among tax-saving instruments as returns on other similar instruments like PPF and NSC are fixed on an annual basis by the government.
ELSS also come with the shortest lock-in period of three years while the minimum lockin in other assets is five years. Additionally, being an equity-oriented fund, longterm capital gains on ELSS are also tax-free in the hands of the investor. In case one chooses the dividend option instead of the growth option, dividends paid by these schemes are also tax-free in the hands of investors. “Many financial analysts and planners suggest that firsttime investors in equity funds should start their investments with through ELSS,” says Neelesh Shah, president of the Karnataka Association Of Mutual Fund Advisors. “This inculcates the habit of saving for the long term and also helps to build a corpus that becomes available after a fixed interval of time,” he said.
How have they performed? Over the years, ELSS have given strong returns. For example, according to a financial planner, if one had invested Rs 70,000 in the month of March of every year since March 1996 in one of the best performing schemes, he/she would have invested a sum of Rs 13.3 lakh till March 2014. The present value of the same investment, as on September 1, 2014, would be around Rs 1.60 crore. If one had invested the same amount annually in PPF, the value would have been Rs 32.04 lakh. “That is the power of market return in schemes like ELSS,” the financial adviser says. These schemes could also be used to create wealth that will be able to beat the current high rate of inflation.
Beware of market volatility Investors should remember that there are some caveats too. “Those interested in ELSS need to understand that these funds provide a better return than most of the fixed income investments. But there is also the risk of the investment value going down due to the equity market volatility,” warns Shah. “A staggered approach to these investments is suggested via the SIP route. This would help the investor average out the cost per unit as also build a long-term, stable portfolio.”