scorecardresearchIt is time you look at ELSS funds for more than just for saving taxes

It is time you look at ELSS funds for more than just for saving taxes

Updated: 12 May 2022, 09:09 AM IST
TL;DR.

If you think that ELSS investments only help to save on taxes, think again. Essentially flexicap in nature, these funds can go a long way in earning you capital gains too. 

One must invest in ELSS funds to save taxes while gaining through capital appreciation.

One must invest in ELSS funds to save taxes while gaining through capital appreciation.

In the whole gamut of equity mutual funds, equity-linked savings schemes (ELSS) seem to be the most neglected lot. As per the latest data released by the Association of Mutual Funds in India, the total number of folios in the ELSS category as on April 30, 2022 was 3,11,781 compared to 1,25,33,497 folios in the large-cap fund category, 68,45,348 in both the large and mid-cap funds category, 88,54,201 folios in the mid-cap fund category and 81,00,585 folios invested exclusively in small-cap funds. 

Most investors relegate ELSS funds to tax-saving purposes without realizing their contribution to capital creation. ELSS investments up to 1.5 lakh a year qualify for tax deductions in that financial year. For the uninitiated, ELSS funds are equity funds, albeit with a difference. Investments in these funds are subject to a mandatory lock-in period and are exempt from tax. However, since many investors view these funds as tax-saving instruments, they exit from the same once the lock-in period is over. This can be a grave and costly mistake considering the yield one can earn from these investments.

Contributions to ELSS funds are exempt from tax under Section 80C of the Income Tax Act. A look at the tax-exempt financial instruments listed under this section reveals that the whole section is congested with investments that are either bound by a prolonged lock-in period or yield fixed returns. Though continuing investments for a long tenure fetch better returns owing to the compounding effect, many people choose ELSS over them owing to the shorter lock-in period. They then either redeem these investments or reinvest the proceeds back into them.

Savouring the returns from ELSS funds

However, there is a lot more to parking money in ELSS funds than just availing tax exemptions. Since ELSS are essentially equity mutual funds, staying invested in them for a long period can yield better returns.

For example, a comparison of returns reveals how SBI Tax Advantage Fund - Series III - Direct Plan-Growth posted 33.68 per cent returns over five years. Second, comes the Quant Tax Plan - Direct Plan-Growth which posted the highest returns of roughly 22.23 per cent followed by Mirae Asset Tax Saver Fund - Direct Plan-Growth which posted a record growth of 16.55 per cent returns over a period of five years.

Now compare these returns with Axis Bluechip Fund - Direct Plan-Growth that outnumbered other large-cap funds with 14.51 per cent returns in five years. The second fund in line in the large-cap category is the Edelweiss Large Cap Fund - Direct Plan-Growth which has earned nearly 12.53 per cent returns while the yield from Invesco India Largecap Fund - Direct Plan-Growth was limited to 12.48 per cent returns over five years. An extrapolation reveals that the ELSS category can garner to the tune of more than 14 per cent average returns in 10 years.

Assuming that have made a systematic investment plan (SIP) of 10,000 every month in both ELSS and blue-chip funds. The total investment made over five years in each of these funds would be 6,00,000.

Name of the fund

Average returns over five years 

(in %)

Estimated maturity amount after five years 

(in Rs)

Name of the fund

Average returns over five years 

(in %)

Estimated maturity amount after five years 

(in Rs)

SBI Tax Advantage Fund - Series III - Direct Plan-Growth33.68 15,61,706Axis Bluechip Fund - Direct Plan-Growth14.51 8,84,554
Quant Tax Plan - Direct Plan-Growth22.23 11,04,111Edelweiss Large Cap Fund - Direct Plan-Growth12.53 8,37,045
Mirae Asset Tax Saver Fund - Direct Plan-Growth16.55 9,36,997Invesco India Largecap Fund - Direct Plan-Growth12.48 8,35,886

Going by the Rule of 72, figures highlight how ELSS funds can help you double your investments in less than five years as opposed to the funds invested in large-cap categories that must be invested for more than five years for the investment amount to be doubled.

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What is the rule of 72?

ELSS combines flexibility along with savings

If you are looking to add investments to your portfolio with the objective of creating long-term wealth, then putting money in ELSS funds must not be ignored. To start with, these funds follow a flexible investment strategy while investing in stocks. Dubbed as tax-saving twins of flexicap equity schemes, many investors put money in them to benefit from the inherent flexibility in these funds other than saving on taxes every year.

You must keep reviewing your ELSS returns from time to time. This will help you realize if your funds are performing as per your expectations. Redeem the ELSS fund if you think that the fund has been underperforming compared to its peers. But till then, wait and watch your money grow.

First Published: 12 May 2022, 08:49 AM IST