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December 27, 2018

ELSS - An opportunity to save tax and generate wealth

Come December and the tax season is on us, and everyone is busy looking at the options available to save tax as partof the annual declaration of income. Most taxpayers tend to look at the usual suspects viz., the traditional fixedincome-heavy tax-saving instruments, but these might just save tax and not generate actual (inflation-adjusted)returns for you. Instead, investors especially with a younger age profile and long-term investment horizon would bebetter off investing in tax-saving options linked to equity such as equity linked savings scheme (ELSS) to also generate wealth over a longer investmenthorizon. Let us look at this in detail in this article.

 

Why equity?

 

Investors have traditionally preferred debt instruments such as public provident fund (PPF) and national savings certificate (NSC) to save taxes as theirprincipal is protected and the returns are stable and predictable. However, their biggest drawback is that their returns can be disappointing whenfactoring in inflation.

 

Equity, as is well known, is among the best wealth creation asset classes in the long term -- the benchmark S&P BSE Sensex has given 15% CAGR onaverage for a 15-year holding period since its inception (1979). ELSS allows investors to harness this power of equity along with the benefits ofprofessional management by mutual funds and a diversified portfolio.

 

The category has been known to deliver inflation-beating returns. For instance, CRISIL ranked ELSS funds have given ~18% annualized returns in thepast 15 years ended October 31, 2018 compared with ~8% provided by a traditional fixed income product (PPF) while inflation (consumer price indexbasedinflation for industrial workers) was ~7.0% during the same period.