The debate on Equity-Linked Savings Scheme (ELSS) versus Unit-Linked Insurance Plan (ULIP) versus Public Provident Fund (PPF) and other Section 80C income-tax saving instruments has been flogged to death over the years. Hence, I shall restrict my discussion in this column to just the ELSS, which I personally rate a few notches above the rest, provided one has the risk appetite for the attendant risks that come with investing in the equity asset class.
Besides the fact that even post the market meltdown of sorts, the better performing ELSS schemes are still reflecting decent double-digit returns over the three-year time frame, is reassuring. Why look first at the three-year returns, one may well ask. That is because the lock-in period for ELSS is three years, which makes it the shortest tenure tax-saving instrument, while for the rest, the minimum lock-in period is at least five years and in some cases, even longer.
Hence, even the shift from the EEE regime to the EET regime whereby ELSS gains are taxable at 10 per cent has not really hampered inflows into this tax-saving instrument. In fact, smarter investors use the SIP route to make their ELSS investments to reduce volatility risks.
A unique feature of ELSS for those that face liquidity constraints is that once funds are infused for the first three years, the same can be redeemed and reinvested without having to bother about a fresh infusion of funds to save taxes under Section 80C. However, post the introduction of the 10 per cent capital gains tax on equity instruments, chances are those that do not have liquidity constraints may choose to stay invested and defer taxability. Interestingly, the 5, 7 and 10 year return performances of many ELSS funds are excellent too.
A couple of noteworthy ELSS funds that have performed well over the years are Axis Long Term Equity Fund and Tata India Tax Savings Fund. The Axis Long Term Equity Fund invests in a mix of large-caps and select mid-caps, and focuses on long-term earnings, growth prospects and quality as key criteria for stock selection. It invests in quality businesses for the long-term using a bottom-up approach. It has focused on sectors such as private sector banks, NBFC, auto and ancillary, housing and consumption, and as a policy, avoids cyclical stories and heavily regulated sectors.
The Tata India Tax Savings Fund has a portfolio of fundamentally good stocks selected using a mix of top-down and bottom-up approach. It blends both ‘value’ and ‘growth’ styles of investing in one portfolio across market capitalisation segments. Conviction calls are made in this portfolio and its top 10 stocks forms nearly half of the portfolio.
As for those investors averse to exposing themselves to the risks that equities carry to deliver superior returns, and have the patience to wait for 15 years to have the option of fully withdrawing their corpus, the PPF, which still enjoys EEE status, might be the optimal choice.
Ashok Kumar heads LKW-INDIA, a wealth management firm, and blogs at www.cricinvest.blogspot.com