Why tax saving Mutual Funds (ELSS) over other options?


One of the best ways to invest is to participate in plans that generate tax-free returns. While there are many available options such as PPF, NSC, NPS and taxing-saving FDs, ELSS trumps as the best investing option.While it does involve market related risks, it also rewards the investors for extra risks. The objective of ELSS mutual funds is to provide tax benefit (up to ₹1.5 lakh) under section 80C and long term growth of capital through a portfolio with a target allocation of more than 65% equity and the rest in money market securities. 

Here are 4 reasons why ELSS funds score much better than other tax-saving investments.

1) Higher returns over the long-term:

ELSS funds invest in stocks and have the highest equity allocation among tax-saving investments. They are best placed to earn inflation-beating returns. Over years, the rate of inflation can consume the returns earned by traditional debt-oriented investments. Equity is an asset class that holds the capacity to beat inflation and so ELSS funds can give you the best of both aspects–high returns and tax saving.

Historically ELSS has delivered far better returns than all the alternate as can be seen from below table. Even the worst performing ELSS schemes have surpassed PPF and other investments over the past 15 years.

2) Lowest lock-in period: Compared to traditional tax-saving investments, ELSS funds come with a lock-in of only 3 years.Most alternatives vary from 5 – 15 years. The 3-year lock-in of ELSS funds is a major advantage as the invested amount is not blocked for long periods. 

Financial Instrument/product Interest or Return Lock-in Period (in Years)
​ELSS Mutual Funds 19.1%* ​3
​PPF (Public Provident Fund)​7.9%**​15
FD (Fixed Deposit)​6%^^​5
NSC (National Savings Certificate)​7.8%^​5
*ELSS Category historical returns as on 31-Oct-17 for last 5years.                                   **GOI/IndiaPost ​                                    ^ Ministry of Finance                            ^^ SBI 5year Term deposit rate w.e.f. 01-Nov-1​7

3) Highest amount of flexibility:

In ELSS scheme, the investor can diversify the investments across different mutual funds based on the performance.Also, tax saving mutual funds has no maturity date so you can stay invested in an ELSS fund even after the lock in period expires. There is no pressure to stay invested; you can stop investing at any time.

4) Volatility can be contained:

Volatility in ELSS schemes is only for short term and they can be contained in the following ways:

SIP: A SIP investment reduces the volatility of your assortment while also making volatility to work to your advantage. It gives you the advantage of buying more when prices are lower and buy less when prices are higher.

Long Term:As the holding period increasesin the equity market, volatility starts reducing graduallyuntil it stops affecting the investors. In the long term equity investments, the compounding factor starts working in favor of the investor.

Since ELSS funds invest in stocks, returns are not fixed. But over the long-term ELSS funds provide room for higher returns as compared to other tax-saving investments. Flexibility and liquidity along with power of equity makes ELSS a better option to invest and generate tax-exempt income

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.