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All about Equity Linked Savings Scheme (ELSS)
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Equity linked savings scheme (ELSS) is the only tax saving mutual fund scheme which provides deductions under Section 80C of The Income Tax Act, 1961. This is an equity fund scheme where majority of funds collected are invested in stocks and shares of listed companies.

This scheme offers different plans according to the objectives, preferences and risk taking capabilities of the investors.

a) Dividend plan – Under this plan, the investor receives regular dividends till the time he is invested in the scheme. This plan ensures some income on continuous basis, therefore the one who desire for regular cash flow may opt for the dividend plan.

b) Growth plan – Under this plan, the investor receives a lump-sum amount at the end of the scheme period. This plan does not ensure regular returns but leads to capital appreciation for the investors.

Features of ELSS

  1. Short lock-in period – ELSS has a shorter lock-in period of 3 years as compared to other tax-saving investment schemes. This makes it convenient for the investor to exit the scheme within a shorter period of time, hence make it more liquid as money can be withdrawn any time after the lock in period.
  2. Higher returns – Since it is an equity fund scheme where investor’s money is invested in stocks and shares of different companies. Hence a diversified portfolio reduces the risk attached with the scheme and increases the overall returns.
  3. Tax saving option – Tax payers under this scheme have the benefit of deductions upto Rs. 1.5 Lakh annually under Section 80C of The Income Tax Act, 1961. The long term capital gains (LTCG) are exempt from tax upto Rs. 1 Lakh per year and are taxed at 10% above that. To receive any benefit in terms of capital appreciation or dividend for the particular year investment should be done in the beginning of year itself.
  4. Systematic Investment Plan (SIP) – SIP is an investment plan in which the investor is required to invest a fixed amount of money at fixed interval for a specified duration. If the ELSS is invested through SIP it elongates its period but ensures financial discipline for the investor and averaging of cost over time because the investor receives higher units in lower demand and lesser number of units in higher demand for stocks.
  5. Diversification – ELSS is a combination of range of asset categories including equity, debt, gold and real estate & offers diversification benefits as an investor need not invest entire Rs. 150,000 (tax-free amount) in the same scheme.

How to evaluate ELSS funds

  1. Fund history – The investor needs to check the fund history of different fund houses to determine their true performance. The safest approach to investment in stock market is investing for long term, so pay the most attention to the fund’s return for 5 years and 10 years. But we should remember past performance may not be sustained in the future.
  2. Expense ratio – Expense ratio is the amount charged by the fund house to manage the fund. Lower expense ratio is preferred because it leads to higher in-hand returns for the investor.
  3. Financial parameters – Standard deviation, sharpe ratio, sortino ratio, alpha and beta are the financial parameters which decide the performance of ELSS funds. Higher standard deviation and beta indicated more risky fund.
  4. Benchmark – The fund’s performance must conform the benchmark performance to ensure better returns. Comparing different timelines against the benchmark as well as peers will be useful.

Disadvantages of ELSS

1. Difficult to choose right ELSS plan Equity linked savings scheme offers various plans such as growth plan, dividend plan or SIP. An investor has to make choice about the right plan according to their preferences and risk taking ability. Choosing a right ELSS plan may be difficult to choose and we may end up choosing a wrong plan. The following factors plays a vital role in choosing fund:

a)     Track record – An investor should track the past record of the mutual fund. Risk adjusted CAGR of the fund should be considered while making any decision. The fund’s performance in accordance with the benchmarks and during different market cycles should be considered to get an overall view.

b)     Risk appetite of the investor – Mutual funds vary in their portfolio composition. Thus ELSS should be chosen based on their financial goals and risk bearing capacity. Large cap funds are more stable and less risky than small cap funds. It is always advised to invest in a growth-oriented and diversified portfolio.

2. More documentation This scheme requires a lot of formalities and a number of documents to be submitted for investing in the scheme.

3. Subject to market risks –Prices of different stocks keep on fluctuating due to a number of factors affecting the stock market. Thus ELSS is subject to market risks. Due to lock in feature we cannot withdraw our money before the period of 3 years in case of falling markets.

Why to invest in ELSS over other schemes?

There are number of tax saving investment schemes available in India such as:

  1. Public Provident Fund (PPF)
  2. National Pension Scheme (NPS)
  3. Sukanya Samriddhi Yojna (SSY)
  4. Senior Citizen Savings Scheme
  5. Unit Linked Investment Program
  6. National Savings Certificate (NSC)
  7. Life Insurance
  8. Pension Plans
  9. ELSS

But ELSS has benefit our above investment avenues:

Scheme

Lock-in period

Return

Risk

Minimum investment

ELSS

3 years

15%-18%

High

Rs.500

FD

5 years

6.5%-8%

Low

Rs.1000

PPF

15 years

8%

Low

Rs.500

NSC

5 years

8%

Low

Rs.100

NPS

Until retirement

10.81% (Subject to various T&C)

Moderate

Rs.100


Top 10 ELSS funds for FY 19-20

Fund Name

Net Assets (In Cr)

1 Yr Returns

3 Yr Returns

5 Yr Returns

Aditya Birla Sun Life Tax Relief 96

8,599

1.19%

13.55%

15.75%

Axis Long Term Equity Fund

18,852

7.43%

15.21%

17.03%

Tata India Tax Savings Fund

1,770

9.89%

15.32%

16.53%

Invesco India Tax Plan

835

5.06%

14.59%

15.67%

Kotak Tax Saver

888

13.41%

15.82%

15.47%

DSP Tax Saver Fund

5,413

9.44%

14.74%

14.20%

ICICI Prudential Long Term Equity Fund

1,992

10.72%

13.91%

12.12%

Franklin India Tax shield Fund

4,025

3.59%

10.75%

13.73%

IDFC Tax Advantage Fund

6,193

1.95%

15.74%

15.10%

L&T Tax Advantage Fund

3,338

-0.16%

13.20%

12.42%

Data source:  www.paisabazaar.com

 

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