Mutual Fund: What makes Equity-Linked Savings Scheme a good bet for investment?

Updated: Feb 07, 2020 10:05 AM

The 10-year and 5-year category returns for ELSS are 8.3% and 9.4%, respectively

ELSS, tax saving investment, ULIP, ELSS schemes, PPF, fixed deposits, equity markets, mutual fundsELSS are also a good starting point for those new to mutual funds; who quickly tend to panic due to inherent ups and downs in equity markets.

By Pankaj K Agarwal

So it is that time of the year again! Many who haven’t completed their tax-saving investments yet are in a hurry. Although this should have been completed by now, as it happens, some of us are still wondering where to invest! A less popular product for tax-saving investments is Equity-Linked Savings Scheme (ELSS). It is an equity mutual fund product that offers potential for capital appreciation along with tax-saving. Plus, it has the lowest lock-in period in the tax-saving investment products category, hence more liquid.

ELSS are also a good starting point for those new to mutual funds; who quickly tend to panic due to inherent ups and downs in equity markets. The mandatory lock-in period of ELSS forces them to stay invested and develop the necessary equanimity for long-term investing.

The closest rival of ELSS are ULIPs. ULIPs have a lock-in of five years and are far less transparent. On tax front, both are treated alike on entry. But at redemption, while gains from ULIPs are exempt, in case of ELSS, capital gains over Rs 1 lakh per year will be taxable. With a tax-saving investment limit of Rs1,50,000 under Section 80C, this is virtually impossible. No wonder, ELSS continue to be preferred over ULIPs.

Returns from ELSS

However, the purpose here is not to compare ELSS and ULIPs. What if you have already decided to invest in ELSS but wondering which one to invest in? Well, help is at hand. We decided to do some number-crunching for you and compare various ELSS schemes.

The 10-year and 5-year category returns for ELSS are 8.34% and 9.40% respectively. However, across 41 ELSS schemes available, there is a huge performance variation. As the graphic shows, Mirae, Axis and Motilal Oswal consistently lead the pack.

The tax benefit on ELSS investment is limited to investment upto Rs1.5 lakh, but you can always invest more. In addition, you can continue to hold them beyond mandatory lock-in period too. Do remember that ELSS is a market-linked instrument and therefore more risky than PPF or FDs. The budget has introduced a new slab rate for income tax where there are no exemptions. However, the current slab rate will also continue.

The writer is professor of finance, IMS Ghaziabad

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1CBDT asks taxmen to process income tax returns filed up to AY 2017-18 with refund claims by October 31
2IRDAI releases guidelines for Corona Kavach, 29 insurers to issue the Covid-19 specific policy
3How much should your emergency fund be in case of a lay off or pay cut? Find out