Excellent Tax Saver and Long Term Wealth Builder – ELSS

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Dear Friends,

                   Investors typically run around for Tax Saving options during the months of Jan and Feb to maximize Section 80C benefits, when the payroll processing team chases them to submit the actuals for IT exemption. Though declarations are submitted during the start of the year by May or June, which is essentially the plan on how the investments are proposed, most Investors are oblivious of this proposal and remember it only in Jan, when the first ultimatum comes their way from the payroll team.

 The investment options are galore under Section 80C including Employee Provident Fund (EPF – company deducts this through payroll and this is an amount that everyone in organized employment saves), Public Provident Fund (PPF), 5 Year Tax Saving Bank Fixed Deposit, National Savings Certificate (NSC), Life Insurance Premium payment, Home Loan Principal payment and Equity Linked Savings Scheme (ELSS) of Mutual Funds.

The finance minister has increased the amount of savings through section 80C to 1.5 Lakhs from 1 Lakh which means you have an additional amount of Rs. 50,000/- that you can save and reduce your taxes. Out of 1.5 Lakhs, EPF is mandatory and gets deducted as part of the payroll. So the available amount for additional investments is 1.5 lakhs – EPF. This amount will be further reduced if you are paying a home loan and the amount of principal repaid can be deducted from this 1.5 Lakhs.

Among the options available for savings through 80C, ELSS is an excellent choice, especially for people in their early stages of career and here is why I say so:

  1. Allocation to equities is extremely important for long term wealth creation, and earn handsome inflation adjusted returns. ELSS provides an option to achieve this objective, especially for people who have limited investable surplus and get the dual benefit of tax savings plus equity investment
  2. The lock in period for ELSS is only 3 years which is the minimum among instruments available under 80 C exemption.
  3. Since ELSS is equity investment, dividend and capital gains returns are completely tax free.
  4. Indian economy is on the revival path with a stable government, decreasing current account and fiscal deficit, policy reforms, decreasing inflation, improving GDP and earnings forecast etc., and all these augur well for good equity market performance in the next 5 to 10 years.
  5. In open ended Mutual Funds, the fund managers are constrained by redemption challenges. The flows are better controlled in ELSS Mutual Funds due to the 3 year lock-in and hence gives them better manoeuvrability for generating additional returns.

I have presented the latest data points (as of 1st week of Nov 2014) on the 1, 3, 5 and 10 year performance of ELSS schemes from various fund houses for you to get an idea. 

ELSS Fund YTD 1-Year 3-Year 5-Year 10-Year
Franklin India Tax Shield 51.5 59.12 23.62 17.85 20.86
HDFC Long Term Advantage 44.4 52.26 22.79 16.2 18.87
HDFC Tax Saver 54 63.62 23.1 15.8 22.45
ICICI Prudential Tax Plan 50 60.01 26.15 18.81 21.66
SBI Magnum Tax Gain 47.8 56.68 24.2 14.04 23.46
Axis Long Term Equity 59.9 71.37 30.81 NA NA
BSE Sensex 31.8 36.21 17.51 10.61 16.7
BSE 100 33.3 38.86 17.57 10.33 16.43
CNX 500 37.4 44.28 18.07 10.32 15.66
BSE 200 35.2 41.2 17.67 10.26 15.92
Category Average 46.7 55.38 22.1 13.73 17.93

The below table shows the value of systematic investments of Rs. 10,000/- per month for a period of 3 and 5 years.

 ELSS Fund 3 Year SIP @ 10,000/month 5 Year SIP @ 10,000/month
Amt. Invested Current Value % Returns Amt. Invested Current Value % Returns
Franklin India Tax Shield ₹ 3,60,000 ₹ 5,53,910 31.66 ₹ 6,00,000 ₹ 9,99,490 21.12
ICICI Prudential Tax Plan ₹ 3,60,000 ₹ 5,88,590 36.50 ₹ 6,00,000 ₹ 10,43,470 22.95
IDFC Tax Advantage ₹ 3,60,000 ₹ 5,60,730 32.63 ₹ 6,00,000 ₹ 9,92,180 20.81
Reliance Tax Saver ₹ 3,60,000 ₹ 6,47,180 44.27 ₹ 6,00,000 ₹ 11,50,780 27.14
Religare Invesco Tax Plan ₹ 3,60,000 ₹ 5,71,590 34.15 ₹ 6,00,000 ₹ 10,14,870 21.77
SBI Magnum Tax Gain ₹ 3,60,000 ₹ 5,64,390 33.15 ₹ 6,00,000 ₹ 9,80,990 20.33

Now that we have seen the merits of ELSS as an investment option, how do we invest in them? Should it be in one go, once a year or through a systematic approach. Some experts recommend investing in ELSS in one go due to the 3 year lock-in (as every investment into ELSS will be locked in for 3 years from the date of investment). But I would like to differ and recommend a systematic investment approach and avail the benefit of cost averaging. To illustrate this with an example, assume that your contribution to EPF per year is Rs. 20,000/- and you want to invest the rest in ELSS schemes. The investible surplus is 1,30,000/- or approx. 11,000/- per month. I would recommend starting 2 SIPs of Rs. 5000/- and 6,000/- each from 2 good ELSS schemes during the start of the year. In case you have not acted till date (Nov 2014) which means you have only 5 months to go for this financial year to make the investment. Your investment every month has to be 26,000/- to maximize the 80C benefit; 13,000/- each per month in 2 quality ELSS schemes would suffice.

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