ELSS= Tax Saving + Wealth Creation + Retirement Planning
If you look at the various investment options under Section 80C of Income Tax Act 1961, you will observe that many of these investments are meant to serve your retirement planning needs in addition to tax savings. Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), life insurance policies (both traditional and unit linked), National Pension Scheme (NPS) etc. are all tax saving investments which are also associated with long term financial planning like retirement.
Equity Linked Savings Scheme (ELSS), another popular Modern investment option under Section 80C, is often perceived to be an investment scheme that matures in 3 years. In this blog, we will discuss about Modern tax planning avenue -ELSS which can also serve long term investment needs especially retirement planning.
Historically, in India, there was a preference for physical assets (e.g. land, property, gold etc.). Among financial assets, traditionally investors preferred risk free investments like bank fixed deposits, Government small savings schemes etc. This preference extended also to Section 80C investments also. As a result employee provident fund, public provident fund (PPF) and traditional life insurance policies have been the investment options, commonly associated with long term investments in India. But can risk free investments meet your retirement needs?
There is a thumb rule in retirement planning called the 30 – 30 rule. The 30 – 30 rule in very simple terms means that you have 30 years of working life, in which you earn, save and invest enough to provide for your 30 years of retirement. The rule sounds simple and obvious, but its implications make retirement planning a serious challenge.
ELSS for wealth creation
It is possible to get a high rate of return on your investment, if you are ready to take risks. Historical data shows that equity is the best performing asset class in the long term. Among the 80C investment options, mutual fund Equity Linked Savings Schemes (also known as ELSS) have given the highest returns over long investment tenures.
ELSS is a mutual fund equity scheme that qualifies for tax savings under Section 80C up to a limit of Rs 1,50,000. An ELSS is essentially a diversified equity scheme with a lock in period of three years from the date of the investment. If you invest in an ELSS through a systematic investment plan (SIP), each investment will be locked in for 3 years from their respective investment dates. Compared to other retirement planning investments under Section 80C,ELSS offers higher liquidity and potentially superior post tax returns.
SIPs in top performing ELSS funds have given around 20% or more compounded annual returns in the last 10 years; if you had invested Rs 5,000 monthly in top performance ELSS funds through SIP, you could have accumulated Rs 15 – 18 lakhs with a cumulative investment of just Rs 6 lakhs in the last 10 years. The last 10 year period in equity markets included three bear markets, in 2008, in 2011 and in 2015 – 2016; therefore, we can conclude that the ELSS returns over the last 10 years were not biased by bull markets.
Equity Linked Savings Schemes (ELSS) are one of the best tax saving investment options as they offer investors triple advantage of superior long term returns, friendlier tax treatment of maturity corpus and higher liquidity.
In the blog post, we will discuss some common mistakes which ELSS investors must avoid.
 Do not make your ELSS investment at the end of the financial year:
If you wait till the final month or quarter of the financial year to make your tax saving investments, then you will lose a lot of returns. Let us discuss this with thehelp of an example-
Suppose you have to make Rs 1 Lakh of tax saving investment in ELSS Mutual Funds every year for the next 12 years. What will be the maturity corpus after 15 years (when the lock in period for the last investment ends) assuming 15% annualized returns and no redemptions in the interim? If you make your ELSS investments at the end of every financial year, your maturity amount will be Rs 44 Lakhs. On the other hand, if you make your ELSS investments at the beginning of every financial year, your maturity amount will be Rs 50 Lakhs. You should try to make your tax savings investments at the beginning of the financial year to maximize your returns. If you do not have sufficient lump sum funds at the beginning of the financial year, then monthly Systematic Investment Plan (SIP) will be the best option for you.
 ELSS is not just for tax savings:
Tax savings should not be the only objective of investing in ELSS Mutual Funds. ELSS Mutual Funds invest in equity securities and as such,are subject to market risks. There may be periods when ELSS will give negative returns, but over a long investment horizon equity as an asset class is likely to give much higher returns than fixed income (the Sensex gave 16% annualized total returns in the last 10 years). Your investment decision should not be dependent on prevailing market conditions. You must invest in ELSS according to your risk appetite and be prepared to hold for a long period of time to create wealth.
 Do not redeem immediately after the lock-in period unless you need money: ELSS has the shortest lock-in period (three years) among all 80C tax saving investment options. However, this does not mean that you should redeem immediately after the lock –in period, unless you need money for some other financial needs, you should remain invested in your ELSS Mutual Fund investments till your wealth creation objective is met. The longer you remain invested, the more wealth you will be able to accumulate.
 Do not select ELSS funds based on short term performance: Many investors select mutual fund schemes based on the last 1 or 2 year performance or based on Google showing current top performing schemes. Mutual fund returns for a particular period are dependent on a variety of market driven factors and the fund manager’s investment strategy, in co-ordination with market conditions prevailing at that period in time. A scheme which gives high returns in the short term may not necessarily be able to sustain it when conditions change. Investors should always contact Wealth Advisor for ELSS Mutual Funds selection as their Long-term experience of Market situation can help your money grow with Good potential based on the long term track record of the scheme and the fund managerdetails knowledge with many other factors.
ELSS – Investment Rationale:
1. Better Inflation Adjusted Returns
Equity is the only Investment option which has potential to generate Real Positive Returns which are Inflation Adjusted. As Inflation in a long period can EAT INTO YOUR RETURNS.
For Example, Higher Education cost in 2000 was around Rs. 3,00,000 whereas the same Higher Education cost is around Rs. 20,00,000 in 2019.This is called inflation which gradually with time reduces the value of money.
2. Wealth generation over a Long Term
Equities is the best source of Investment which can help generating WEALTH over a long term.
3. Professional Management
ELSS is the only Investment option which is having qualities of Active Portfolio management with an objective to Reduce Volatility and Generate Alpha (Profits).
ELSS- Key benefits :
1. Lower Lock in Period
ELSS currently has the lowest lock-in -period (three years) among all Tax Saving Investment avenues under Section 80C of Income Tax Act,1961.
2. Operational Ease
Investments can be made either in Lumpsum or Systematically. (SIPs)
3. Power of 3
ELSS Investment is providing 3 powerful benefits :
Tax Saving + Wealth Creation + Retirement Planning over a long term
4. Blend of Growth and Value
Investors can get benefit form BLEND INVESTMENT STYLE/Diversified Investment. (Combination of Growth and Value)
The important takeaways form this ELSS Blog will be :-
• Start your tax planning early and make your tax saving early in the year or through monthly SIP.
• Invest according to your risk appetite and be prepared for intermittent volatility.
• Redeem only when you need money irrespective of lock-in status and be prepared to remain invested for the long term.
• Select ELSS Mutual Funds as per Wealth advisor’s advice.
Before you Invest, Once think
You do so much more everyday than just your job/business. But does your Tax-saving instrument do more than just save tax?Like (1)