Equity Linked Savings Schemes (ELSS) are a popular tax saving investment option under Section 80C. But are these mutual funds worth the risks for retail investors? Here’s an assessment of ELSS to help you decide:
What are ELSS funds?
Equity Linked Savings Schemes (ELSS) are a type of equity mutual fund that provides tax benefits under Section 80C of the Income Tax Act up to Rs 1.5 lakh annually along with market-linked returns. ELSS funds have some key features that make them unique as a tax saving investment:
Firstly, they come with a 3 year mandatory lock-in period, which is the shortest lock-in of all the Section 80C tax saving instruments. This allows investors to get exposure to equities while also availing tax benefits for at least 3 years.
Secondly, ELSS funds invest predominantly in equities, providing equity market-linked returns. This exposes investors to higher risks compared to fixed income options, but also provides the potential for higher inflation-beating returns in the long run.
Thirdly, ELSS allow tax deductions up to Rs 1.5 lakh in a financial year under Section 80C, which is higher than the limit for other options like PPF, NSC etc. Additionally, there is no upper limit on the amount you can invest in ELSS for claiming tax benefits.
Fourthly, long term capital gains from ELSS after the 3 year lock-in are taxed at just 10% after indexation benefit. This makes ELSS tax efficient for long term investors.
Finally, ELSS suits investors comfortable with equity exposure and the associated volatility. More conservative investors looking just for tax saving may prefer traditional fixed income options like PPF, EPF, NSC etc. over ELSS.
Assessing ELSS fund performance
Nippon ELSS funds have delivered healthy long term returns beating inflation and PPF returns over the last decade. Top ELSS funds have provided 15-18% CAGR returns on average.
However, being market-linked there is variability each year. The last 3-5 year returns range from 10-16% for leading ELSS funds. The lock-in period helps ride out short term volatility.
But lacklustre fund management can also impact returns. Stick to well managed funds from reputed AMCs for better outcomes.
Weighing the pros and cons
ELSS funds offer these pros:
– Higher long term return potential
– Beat inflation and PPF returns over long term
– Tax deduction up to Rs 1.5 lakh under Section 80C
– No maximum limit on deduction amount
– Long term indexation benefits after 3 years
The cons to note are:
– Carry higher risk than traditional 80C options
– Lock-in means no early withdrawals
– Lack of fund management can impact returns
– Not ideal for conservative investors
– Past returns not indicative of future performance
Are ELSS right for you?
Evaluate your risk profile, investment horizon and asset allocation needs.
ELSS funds can be rewarding for investors with higher risk tolerance and ability to remain invested long term. Use SIPs and track fund performance using tools like mutual fund calculators.
Conservative investors can stick to traditional 80C options like PPF, VPF, NSCs. Optimal investing requires aligning investments with your specific financial situation and goals.