It is that time of the calendar year when many taxpayers wake up to the need of completing their Tax-saving investments. While there are multiple options on offer, the sole pure equity option on offer in this category is the Equity Linked Saving Scheme (ELSS) offered by Mutual Fund houses.
The 3-year performance of the ELSS as compared to its alternative tax-saving instruments has been superior more often than not. The reason for 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.
Another popular option is the Unit Linked Insurance Plan (ULIP) product offered by Insurance companies, where the lock-in is restricted to five years though ideally one should hold it for longer tenure to optimise returns. In case of ULIPs, the investor also has two-way fungibility between Equity and Debt.
For almost all the remaining Tax-saving instruments, the underlying investment vehicle is debt and the minimum lock-in period is at least five years with most being even longer. Of such investment options, the Public Provident Fund (PPF) remains the most popular tax-saving debt based investment for those averse to equity. The lock-in period is five times longer though in this case, though the returns unlike ELSS are still tax-free.
Besides its plus points of being the only tax-saving instrument where the underlying asset class is equity and its being locked in for just three years, there is another unique feature that the ELSS offers investors.
Once the funds complete three years of investment, the same can be redeemed and reinvested without having to bother about a fresh infusion of funds to save taxes under Section 80C. Hence, the outflows can be restricted to three years and thereafter, the funds can be rolled over if needed, thus not impacting a tax payer’s liquidity.
Let us now zero in on the performance of a couple of ELSS funds with a reasonable track record over three years. DSP Tax Saver Fund has an AUM of `9,805 crore and currently holds a mix of Large caps (67%) and Mid caps (28%) with the balance 5% in Small caps. This fund’s three-year returns are around 23%.
Invesco India Tax Plan has an AUM of `1,898 crore. It currently holds Large Caps (around 66%), Mid caps (24%) and Small Caps (10%). This fund has delivered returns of around 21% over three years. One suggestion I always make while discussing ELSS with anyone is that investors in ELSS would do well to consider completing it during the early part of the year so that their compounding tenure increases. Alternatively, plan it as an SIP and let it run on auto-pilot for at least three years.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com