It is that time of the year, albeit not necessarily the right time, when there is a race to close out one’s tax-saving investments and the Equity-Linked Savings Scheme (ELSS) gets actively considered. ELSS took a bit of a knockdown a couple of years ago, when it moved from the Exempt-Exempt-Exempt to Exempt-Exempt-Taxable regime, after the re-introduction of long-term capital gains on equities. More recently, the suggestion that tax-saving investment exemptions will soon be done away with, would have further hampered investments in this product offering by mutual fund houses.
Nonetheless, provided one has the risk appetite for the attendant risks that come with investing in equity asset class, ELSS can still make a compelling case for investment till exemptions are fully phased out.
One never knows with Indian tax laws. Yet another U-turn somewhere down the line might change the ground situation again. Even post the broader market meltdown, the better performing ELSS schemes are still reflecting fairly agreeable double-digit returns over a three-year time frame.
The reason of focusing on three-year returns here is simply 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. In some cases, its longer.
A unique feature of ELSS for those who 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 introduction of the 10 per cent capital gains tax on equities, chances are that those who 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 fairly agreeable too. A couple of ELSS funds that have performed well over the years are Axis Long Term Equity Fund and the Mirae Asset Tax Saver Fund.
The Axis 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 stocks. It invests in quality businesses for long term using a bottom-up approach.
It has delivered over 15 per cent return over the last three years. The Mirae fund has a diversified portfolio of strong growth companies bought at a reasonable price. It follows a bottom-up approach and seeks growth-oriented businesses. Its portfolio has a strong large-cap bias with mid- and small-caps bringing up the rear end with 25 per cent exposure. This fund has delivered over 13 per cent return over the last three years.
With those that swear by the Public Provident Fund, I have no argument. It remains the ideal tax-saving debt-based investment for those averse to exposing themselves to the risks that equities carry to deliver superior returns, and with the patience to wait for 15 years to have the option of fully withdrawing their corpus, sans any tax-haircut.
Ashok Kumar
heads LKW-INDIA. He can be reached at ceolotus@hotmail.com