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By Mr Vipul Mehrotra, Deputy Vice President – Anand Rathi The Equity Linked Saving Scheme (ELSS) category has emerged as the biggest equity oriented... Make ELSS investments a 12-month habit, not a last-minute tax hack

By Mr Vipul Mehrotra, Deputy Vice President – Anand Rathi

The Equity Linked Saving Scheme (ELSS) category has emerged as the biggest equity oriented mutual fund space, with over 1.14 crore investor accounts. These tax-saving funds manage over Rs 90,000 crore, the largest in terms of assets after multi cap and large cap funds. Every year during the last three months of the financial year, there is a mad rush to save tax. ELSS is ideal for investors who want to incur benefits throughout the year. Offering twin benefits of wealth creation and tax efficiency, a regular, disciplined and consistent long-term approach will help investors like you reap rich dividend through ELSS investments.

Not a JFM thing

ELSS investments help reduce your gross taxable income by up to Rs 1.5 lakh a year under Section 80C, thus saving actual tax of over Rs 46,000. This is one of the reasons many slow-moving taxpayers start investing in ELSS in large lump sum investments in January, February and March. Make ELSS investments a 12-month habit, not a last-minute tax hack.

The smartest way to go about it is doing a systematic investment plan (SIP) that divides the investment amount into 1/12th compared to 1/3rd. This helps you potentially buy more units at a lower cost, and reduces market risk, while also greatly cutting the burden compared to forking out Rs 50,000 a month in January to March period. Yes, the benefits of ELSS investments can be realized throughout the year.

Create long-term wealth in bite sizes

ELSS investments are primed for long-term. With fund managers carefully building a portfolio given the 3-year investment lock-in, top-quality stocks are hand-picked to balance growth and stability. As a result, investors get a smooth investment journey, shorn of the ups and downs that are associated with market-linked products.

Even the worst-performing 10-year ELSS SIP with 8.1% annual return has generated more money than competing investment avenues, while the best returns are in the order of 13-14% a year. For longer tenure like 20 years, the best returns are nearly 20% while the worst one has still delivered 12% a year. This means R 1000 a month SIP delivered maximum Rs 28 lakhs in 20 years while the minimum amount was Rs 10 lakh, for a total investment of Rs 2.4 lakh only.

A consistent approach matters in investing. With ELSS saving up Rs 46,800 a year in taxes and creating wealth creation over the long-term, consistency helps beat returns generated in so-called safe tax-saving avenues like PPF.

Choose correct fund

Given the wide range of returns generated in the ELSS space, it is important to select the right product. For instance, there are ELSS products with negative returns in 3-year while there are products in the same tenure with close to 10% return. Another area to watch out is consistent out-performance.

Your ELSS investments are supposed to beat its benchmark, regularly. For instance, ICICI Prudential Long Term Equity Fund, managed by two fund managers with over 36 years of experience, has outperformed its benchmark in terms of 5-year returns about 91% of the time since inception.

Consistent out performance of an ELSS across various time periods show that the investment approach and execution has stood the test of time. Such funds are better for retail investors who want a hands-free experience when it comes to wealth creation. Lastly, a value investing approach to stock selection is vital. Given that the three-year lock in period allows flexibility to select stocks with long term perspective, ELSS is fit for investors with a long-term vision to create wealth and save taxes.

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Parul Bishnoi