How to earn higher long-term returns with Equity Linked Savings Scheme

By: | Updated: October 24, 2018 4:36 PM

At a time when assets under management of mutual funds declined 12.5% to Rs 22 lakh crore at September-end due to massive outflows from liquid funds and income schemes, equity and equity-linked savings schemes (ELSS) saw an infusion of Rs 11,250 crore.

Earn higher long-term returns with ELSS

At a time when assets under management of mutual funds (MFs) declined 12.5% to Rs 22 lakh crore at September-end due to massive outflows from liquid funds and income schemes, equity and equity-linked savings schemes (ELSS) saw an infusion of Rs 11,250 crore. Folios in equity and ELSS grew by 56 lakh to 5.91 crore in the first six months of the current fiscal. Growing investor interest in mutual funds was reflected in the fact that there was an inflow of Rs 60,475 crore in equity-related schemes. Overall, there was an addition of over 65 lakh new folios during the period, taking the total to an all-time high of 7.78 crore at the end of September.

How ELSS works

So, as individuals prepare for tax savings, ELSS can be a good option to not only save on tax, but also earn higher long-term returns. The scheme qualifies for tax rebate under Section 80C . An individual taxpayer must consider ELSS for discretionary tax-saving investments. However, the returns are taxable on redemption as long-term capital gains is applicable after one year at 10%. There is lock-in of three years and almost the full amount is invested in shares of various companies. There is no cap or limit on how much an individual can invest in an ELSS.

In fact, ELSS has the lowest lock-in period as compared to other tax-saving instruments such as Public Provident Fund, National Savings Certificate and 5-year bank fixed deposits. If a taxpayer in the highest 30% bracket invests up to Rs 1.5 lakh in ELSS in a year, he can save as much as Rs 46,350 in taxes. Moreover, ELSS has lower investment threshold as the minimum investment amount is Rs 500 and and one can invest a lumpsum amount or invest every month through Systematic Investment Plans (SIPs).

One of the biggest advantages is that an investor will not have to look at the performance of individual stocks regularly. The fund manager will investment in diversified stocks and sectors, which reduces the risks in case of any cyclical markets volatility. However, returns are dependent on the fund manager’s ability to pick the right stocks.

Higher returns

Data show that returns from ELSS schemes are slightly better than other equity mutual fund schemes. As fund managers have the mandate to invest the money for at least three years, they can take long-term calls and need not worry about quick or fast redemption from the scheme. That reduces the volatility and increases the consistency and the returns also improve. Moreover, as many invest in ELSS through SIP, the book grows with every three-year lock-in, which helps the fund manager to grow the assets and earn higher returns.

Experts say is is better to divide the amount to be invested in ELSS into 3-5 funds rather then putting all money in one fund house. Similarly, if an investor is planning to invest Rs 5,000 every month in ELSS through SIPs, then it is better to divide it into two SIPs of Rs 2,500 each so that the investment gets properly diversified.
Growth vs dividend options

Fund houses offer growth and dividend options to investors. In growth option, an investor does not receive any dividend and the entire corpus along with the returns will be given back to the investor after maturity. It is an ideal option because of the compounding benefits in the long run and increase in NAV of the fund. In dividend payout option, investors receive dividends on a periodic basis as declared by the fund houses. Dividend payout option is better for those investors who are either retired or who are looking for additional income to supplement their household expenses.

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