Ask investors why they invest in equity-linked savings schemes (ELSS) and their first response would be in favour of savings on taxes. This may lead us to the question, “Why not park money in a public provident fund (PPF) account?”. The returns are also fixed, which relieves you of the tension due to market volatility.
However, the fact that some investors look at ELSS funds only to avail of tax deductions under Section 80C of the Income Tax Act, 1961 reveals their ignorance of the significance of these funds in creating wealth.
The fact that parking money in ELSS serves your investment purpose apart from helping to save on taxes is unknown to many. However, many new investors also put money in these tax-saving funds as a stepping stone to investing their earnings in the equity market.
Earning from PPF investment
Assuming that you are 25 years old and contemplating putting ₹150,000 in your PPF account every year for the next 15 years. The current PPF interest rate is 7.1 per cent.
- Yearly investment: ₹1,50,000 divided into 12 equal instalments of ₹12,500 each
- Investment frequency: Monthly
- Investment tenure: 15 years
- Interest rate: 7.1 per cent
- Maturity amount: ₹39,44,599
Instead of parking money in PPF, put the same in an ELSS fund for the coming decade. The one benefit of investing in ELSS funds is that you do not have to stay invested for the next 15 years, which means that you can just park money for the mandated lock-in period, i.e., three years. The three-year lock-in period helps investors weather the stock market volatility while returns from its portfolio ensure it considerable protection against downside risk.
However, if you are willing to benefit from market returns, you can continue to put your money for a decade. Thereafter, you can put the money in some debt fund or fixed deposit to earn six per cent risk-free returns.
The following table highlights how much you can gain by putting money in ELSS funds for at least five years.
|Name of the Fund|
|12,500||Quant Tax Plan||42.30||8,45,920||24.30||14,38,044|
|12,500||Canara Robeco Equity Tax Saver Fund||22.30||6,32,511||16.94||11,67,825|
|12,500||Mirae Asset Tax Saver Fund||20.60||6,15,662||16.15||11,42,649|
|12,500||IDFC Tax Advantage (ELSS) Fund||22.87||6,38,287||14.40||10,89,216|
You may choose to withdraw your corpus immediately after the lock-in period or after five years or continue investing for more wealth creation. Most equity-based instruments offer 12 per cent returns over 10 years. This means that instead of withdrawing the money, you can also let it stay invested to continue earning on the accumulated corpus. Alternatively, you can withdraw your money after three or five years and put the money in bank deposits at the current six per cent rate.
The following table compares returns on continued investments on the corpus in ELSS funds for the next five years versus the withdrawal of the amount for investment in bank deposits. For ease of calculation, let us assume that an investor has accumulated a ₹10,00,000 corpus through ELSS in five years.
|Opening investment balance||Nature of investment||Expected interest rate||Total value of the returns|
There is more to putting money in ELSS funds than just saving on taxes. Investing money is about seeing your money grow. This is only possible when you know that you have invested in some well-chosen fund.