The Premise.
Deciding what is the right way of investing takes up lots of thorough research and energy. There are various funds that have many benefits to them. In this article, we want to introduce you to one of the most advantageous financial instruments that has two distinct advantages. One is linked to the returns while the other is linked to the tax-based advantages.
ELSS Basics
What are Equity-Linked Savings Schemes (ELSS)?
Equity-Linked Savings Schemes (ELSS) is a type of Mutual Fund. What makes this unique is the taxation advantages that you receive upon being invested in this scheme. ELSS funds are primarily linked to equity and equity-related products. By having a direct correlation with respect to the growth trajectory of the underlying equities, the ELSS has a great potential to accumulate wealth over time. New Investors can definitely acquire this investment as they get to understand the investment process within Mutual Funds and how the wealth is acquired by holding long term equity positions indirectly by watching the ELSS Fund play out over the years. If they are risk intolerant, the funds can be liquidated almost instantaneously as the lock-in period is very small as well. ELSS Mutual Funds generally hold equities and equity related products of companies across the market capitalization, including small, medium, and large cap, but sometimes, ELSS Funds can have exposure to Securities too.
The fund manager is responsible for the various decisions that are taken to make strategic allocation decisions with respect to these different equities and securities.
Benefits of ELSS for tax-saving.
The biggest benefit that is alluring to a lot of new investors with respect to the ELSS Mutual Fund is the tax rebate possibility with these funds. Investments in ELSS are eligible for tax deductions under Section 80 of the Income Tax Act of 96. A tax rebate of upto ₹ 1,50,000 can be claimed under this law and annual taxes of upto ₹ 46,800 can be saved by investing in ELSS Mutual Funds.
Any gains you make upon holding the ELSS Mutual Funds for the long term will, however, be taxed at 0% on the gains. Even after the lock-in of 3 years, if your gains are under ₹ 1 lakh, then you do not need to pay any tax on the gains at all.
This possibility of a short lock-in period where you make the investment and save on your annual taxes, while being able to make tax-free long term capital gains upto ₹ 1 lakh, tax-free, is a very attractive proposition for the short term.
Top ELSS Funds
Here are some of the best-performing ELSS funds.
Quant Tax Plan:
Launched on April 13, 2000, it operates as an open-ended scheme with a statutory lock-in period of three years. With an indicative asset allocation pattern of 80-100% in Equity, Cumulative Convertible Preference Shares, and fully convertible debentures and bonds, the fund adopts a high-risk profile. It allows for 0-20% allocation in Money Market Instruments. This fund has generated an XIRR of 32.23% over the past 5 years. The fund size is ₹4,957 Crs.
Bank of India Tax Advantage Fund: This fund has generated an XIRR of 24.04% over the past 5 years. The fund size is ₹860 Crs.
Bandhan ELSS Tax Saver Fund:
The current value of a ₹10,000 investment reflects the fund’s growth:
1 Year: ₹11,390 3 Years: ₹21,481 5 Years: ₹22,219 10 Years: ₹48,612 Since Inception (26/12/2008): ₹1,15,784.
This fund has generated an XIRR of 23.55% over the past 5 years with a fund size of ₹5,040 Crs.
Franklin India Taxshield Fund:
This fund has a consistent ranking of 4 out of 5 and a rank of 5 out of 31 funds on ET Money which portrays the funds’ reliability and market positioning. This fund has generated an XIRR of 20.43% over the past 5 years. The fund size is ₹5,224 Crs.
DSP Tax Saver Fund:
This fund strategically allocates its assets with 97.71% invested in domestic equities, including 54.71% in Large Cap stocks, 20.61% in Mid Cap stocks, and 9.78% in Small Cap stocks. This medium has generated an XIRR of 20.26% over the past 5 years. The fund size is ₹ 11,693 Crs. Even while having a Very High Risk profile, the DSP Tax Saver Fund has gained recognition and has held the 9th position out of 31 funds and possesses a consistency rating of 3.
SBI Long-Term Equity Fund:
This fund has an allocation profile of 94.51% in domestic equities, distributed across large-cap stocks (56.98%), mid-cap stocks (13.74%), and small-cap stocks (12.05%) and has generated an XIRR of 22.72% over the past 5 years. The fund size is ₹ 5,774 Crs. Absence of debt can be observed and a cash allocation of 5.40% of the portfolio reflects a focus on equities for potential growth.
Motilal Oswal ELSS Tax Saver Fund: The fund’s objective is to generate long-term capital appreciation using equity instruments. It has a moderately high to high market risk compared to debt and balanced funds. The fund focuses on domestic equities, and the fund’s portfolio comprises a well-diversified mix of large-cap, mid-cap, and small-cap stocks. So far, the fund has generated an XIRR of 21.27% over the past 5 years. The fund size is ₹2,508 Crs.
HDFC ELSS Tax Saver Fund:
Over the last year alone, there’s remarkable growth that can be seen with this fund, providing returns of 18.51%. This fund has generated an XIRR of 21.09% over the past 5 years. The fund’s Assets Under Management (AUM) amount to Rs. 11,271.61 Crores. Speaking of returns; 1-year return of 18.64%, 3-year return of 25.32%, 5-year return of 15.29%, and an impressive return of 23.28% since its inception on March 31, 1996.
Historical returns of popular ELSS schemes.
| Fund Scheme Name | 5-year XIRR | Size |
|---|---|---|
| Quant Tax Plan | 32.23% | ₹4,957 Crs |
| Bank of India Tax Advantage Fund | 24.04% | ₹860 Crs |
| Bandhan ELSS Tax Saver Fund | 23.55% | ₹5,040 Crs |
| SBI Long Term Equity Fund | 22.72% | ₹15,774 Crs |
| Motilal Oswal ELSS Tax Saver Fund | 21.27% | ₹2,508 Crs |
| HDFC ELSS Tax Saver Fund | 21.09% | ₹11,272 Crs |
| JM ELSS Tax Saver Fund | 20.74% | ₹91 Crs |
| Franklin India Taxshield Fund | 20.43% | ₹5,224 Crs |
| Union Tax Saver (ELSS) Fund | 20.33% | ₹695 Crs |
| DSP Tax Saver Fund | 20.26% | ₹11,693 Crs |
ELSS vs. Other Tax-Saving Instruments
Comparing ELSS with PPF, NSC, and other tax-saving options.
If you compare ELSS with PPF, NSC, and any other tax-saving alternative, ELSS always comes on top because of one primary reason. That reason is that it is an asset class that is tied to the equity market which ensures the gains it produces are competitive. Public Provident Fund (PPF) is a fixed-income investment option that gives a guaranteed rate of return and has a lock-in period of 15 years. While the National Savings Certificate (NSC) is a fixed-income investment option that offers a guaranteed rate of return and has a lock-in period of 5 years, ELSS only has a lock-in period of 3 years. This fact along with the potential for greater returns rather than the fixed rate of return makes the ELSS the best tax saving instrument that exists out there.
Other tax-saving instruments under Section 80C of the Income Tax Act, 1961 include life insurance policy premiums, contributions made under the Employees’ Provident Fund Scheme, contributions to Public Provident Fund Account/any recognized provident fund, subscriptions to National Savings Certificates (VIII Issue), tuition fees (excluding development fees, donations, etc.) for full-time education of any two of his/her children, and more.
Even though there is a threat of the market collapsing, and taking down the Mutual Fund investment, this scenario is highly unlikely as India has been on a Bullish growth trajectory for the past few decades and will only continue to get bigger from here. The Indian growth story is unfolding now and it’s time to ride the growth wave along with India’s rise to the top.
ELSS Mutual Funds with its double advantages comes out on top no matter how you consider your investment strategy. Whether you want to save a chunk on your annual taxes or you want to stay invested in India’s economy, ELSS allows you to get the best of both Worlds simultaneously.
