Equity Linked Savings Scheme (ELSS) – Start your SIP today

With the start of a new financial year, Nifty and Sensex are heading towards all-time record high levels. It is difficult to predict where benchmark indices will be as on March 31, 2018, but investors persisting and investing regularly via SIP in equity mutual funds for the long-term, investing in quality businesses through direct equity will generate a lot of wealth. For retail investors, it is always a difficult aspect as to from where to start investing in equity markets. Systematic Investment Plan (SIP) in ELSS funds is one such investment option which investors must consider to start investing in equities markets and save tax in the process.

ELSS Funds – Save tax and create wealth

It will be a smart move to start investing in Equity Linked Saving Schemes (ELSS) from April 2017 onwards. By the time the financial year 2017-18 is complete, you will already have 12 SIP installments executed successfully, buying units every month leading to cost averaging and also not heavy on your pocket. ELSS funds are tax-saving mutual funds that you can use to save income tax of up to Rs 1.5 lakh under Section 80C. But eventually, it is not just about saving tax. Most investors consider investing in tax saving instruments to save tax. No, such an investment should also be in sync with your long term goals.

Investors must be mindful of the fact that ELSS schemes have a lock-in of 3 years from the date of purchase and NAV can fluctuate depending on the state of equity markets. But over the long term, volatility is investor’s best friend. Market meltdown during demonetization and its roaring comeback are a very recent testimony of that. So keep investing through SIP per month is always the best strategy to opt without any attempt to time the market. As an investor, we must understand that staying in the market for a long time with investment discipline is as important as an appropriate fund to buy. Don’t stand and watch on the sidelines the Indian Growth story – take a plunge and in no way it is a marketing gimmick – it is necessary for you to invest correctly now to fulfill all your long term goals.

ELSS Funds Returns Revisited

If you would have opted for a monthly SIP of 5000/- in ELSS fund Axis Long Term Equity Fund – Regular Plan (Growth) from April 01, 2010 to March 01, 2017, the fund would have returned SIP Investment Returns(CAGR) of 18.85%. Isn’t it excellent?

Not impressed?

If you would have opted for a monthly SIP of 5000/- in ELSS fund Reliance Tax Saver Fund – Regular Plan (Growth) from April 01, 2010 to March 01, 2017, the fund would have returned SIP Investment Returns(CAGR) of 19.17%.
18.85% or 19.17% is by no means an ordinary return and your fund value can be more phenomenal in case you increase time frame to 10-15-20 years and increase your SIP as your investible surplus increases.

Let’s go back in 1990’s…..

Let’s look at HDFC Tax Saver. This ELSS fund which was launched in 1990’s has given a staggering return of 22% from April 1, 1999, to March 31, 2017, in case you have opted for monthly SIP of 5000/- per month – what is translates to – 10,80,000 would have become staggering 10,448,541,09.

However, we should always look at both sides of the coin. Now let’s look at some ELSS funds which have NOT been on the top of charts consistently and how they have performed….
If you would have opted for a monthly SIP of 5000/- in ELSS fund LIC MF Tax Plan – Regular Plan (Growth) from April 01, 2010 to March 01, 2017, the fund would have returned SIP Investment Returns(CAGR) of 12.36%….Yes, 12.36% which is not bad at all by any standards.

So should you invest?

Past performance may not translate in future, but as our readers, I hope you must have got a fair bit of idea as to how crucial ELSS funds are in the overall scheme of things and they hold an important place in your financial portfolio. For investors in 20’s and 30’s, there’s no excuse as to NOT to invest in ELSS funds for tax saving and capital appreciation purpose.

Earlier you start, better it will be.Don’t buy expensive ULIP policies or over invest in PPF to save tax. ELSS funds are simply the best vehicle to take care of your 80c tax planning in case you find a way to invest in equities for long-term and want to piggyback on fund manager capabilities. There are some excellent ELSS funds available in the market and you should start investing immediately.

While I am compiling this write-up, markets are at an all-time high and some would argue that numbers mentioned above can change quickly in case market corrects big time in the next few months. But over the time, rupee cost averaging will take care of market cycles and a downturn will be a good opportunity to buy units at less NAV. This will lead to better long-term returns and monthly SIP will do the job for you. Don’t try to time the market and keep investing via monthly SIP.

Investors who are waiting on sidelines to start SIP should start SIP now without a second thought. You are investing systematically per month and not committing lump sum amount in the market at any given point of time. Post lock-in of 3 years is complete, don’t redeem investment just because lock-in is complete. Analyze fund performance against category performance and stay put if the fund is doing reasonably well and meeting your expectations. Look for funds which provide consistent returns rather than choosing funds solely on star ratings. Fund can’t be on the top of rankings every time.

Why investors resist investing in Equity Linked Savings Scheme?

  • A majority of individuals are not aware if such as option is available under Section 80C for tax saving and its potential to create enormous wealth over a long term.
  • Not aware of the fact that as to exactly how the ELSS fund works – kinds of funds which are available under the umbrella and how the lock-in in tax saving funds work.
  • Favouring investment in PPF as compared to ELSS funds due to the natural investing pattern which family has been adopting since ages.
  • Have a predefined notion that equity is risky even in the long term and its a place wherein you can only loose money.
  • Some advisor has already sold you an expensive ULIP policies and now there is no further scope of tax saving under section 80C.
  • Home Loan Principal and EPF already takes care of tax saving under Section 80C.

If your reasoning is anything other than the last point mentioned above, you need to rethink your investment strategy and make investing in ELSS funds as an integral part of your overall financial portfolio.

PPF vs ELSS Funds – An Eye Opener

Let’s do a return comparison of Public Provident Fund (PPF) vs an equity linked savings scheme for an extended period. We know it’s like comparing apples to oranges as one belongs to debt category and other to equities. PPF is an excellent instrument to invest for the long term but point is that investors can’t shun equities completely in their journey to achieve long-term goals. Allocation can vary in line with investor’s risk appetite but ideally, it should not be ELSS allocation – 0%, PPF – 100% – atleast for young investors. Return difference is too huge to be ignored. Investors need to understand that due to equity component in ELSS, returns generated by ELSS funds over a long term are likely to be much much more than debt options such as PPF and NSC – though with its own share of risk and volatility.

Period Amount deposited every year Total Investments Rate Of interest in PPF


Valuation in PPF HDFC Tax Saver NAV HDFC Tax Saver Valuation Sensex
29-Mar-1996 1,50,000 1,50,000 1,50,000 10.00 150,000.00 3,367
31-Mar-1997 1,50,000 3,00,000 12% 3,18,000 9.04 285,600.00 3,361
31-Mar-1998 1,50,000 4,50,000 12% 5,06,160 12.40 541,752.211 3,893
31-Mar-1999 1,50,000 6,00,000 12% 7,16,899.20 19.84 1,161,391.29 3,740
31-Mar-2000 1,50,000 7,50,000 11% 9,45,758.11 41.56 3,443,000.68 5,001
30-Mar-2001 1,50,000 9,00,000 9.50% 1,185,605.13 15.72 2,781,196.15 3,604
28-Mar-2002 1,50,000 10,50,000 9.00% 1,442,309.59 19.86 3,663,648.57 3,469
31-Mar-2003 1,50,000 12,00,000 8.00% 1,707,694.36 18.64 3,588,590.61 3,049
31-Mar-2004 1,50,000 13,50,000 8.00% 1,994,309.91 40.12 7,874,518.29 5,591
31-Mar-2005 1,50,000 15,00,000 8.00% 2,303,854.70 67.56 13,408,504.04 6,493
31-Mar-2006 1,50,000 16,50,000 8.00% 2,638,163.08 131.22 26,195,119.97 11,280
30-Mar-2007 1,50,000 18,00,000 8.00% 2,999,216.13 133.88 26,875,917.35 13,072
31-Mar-2008 1,50,000 19,50,000 8.00% 3,389,153.42 152.02 30,666,999.71 15,644
31-Mar-2009 1,50,000 21,00,000 8.00% 3,810,285.69 97.06 19,730,522.25 9,901
31-Mar-2010 1,50,000 22,50,000 8.00% 4,265,108.55 205.68 41,959,485.46 17,692
31-Mar-2011 1,50,000 24,00,000 8.00% 4,756,317.23 232.90 47,662,697.76 19,445
30-Mar-2012 1,50,000 25,50,000 8.60% 5,315,360.51 223.70 45,929,929.11 17,478
28-Mar-2013 1,50,000 27,00,000 8.80% 5,933,112.24 225.33 46,414,599.58 18,865
31-Mar-2014 1,50,000 28,50,000 8.70% 6,599,293.00 276.79 57,165,411.51 22,386
31-Mar-2015 1,50,000 30,00,000 8.70% 7,323,431.49 404.76 83,744,661.10 28,504
31-Mar-2016 1,50,000 31,50,000 8.70% 8,110,570.03 354.03 73,396,888.67 25,270
  • Valuation as on 1/Feb/2017
    • Amount invested in PPF : 31,50,000
    • Rate of interest on PPF on 1/Feb/2017 : 8.10%
    • Total PPF Corpus : 8,598,459.48
    • NAV of HDFC Tax Saver as on 1/Feb/2017 – 443.59
    • Total HDFC Tax Saver Corpus : 91,964,575.56
    • Sensex Value : 28,141
  • Amount Invested per year: 1, 50,000
  • Past performance may or may not be sustained in future.
  • Mutual Fund investments are subject to market risk
  • Interest rates on PPF are as per applicable in that specific year

You can appreciate the difference between 2 corpus: 8,598,459.48 (PPF) and 91,964,575.56 ( HDFC Tax Saver – ELSS Fund)

ELSS Funds: Few more data points

To provide our readers with more data points, please find below returns of some of the ELSS funds available to invest:

3 month (%) 6 month (%) 1 year (%) 3 year (%) 5 year (%)
Axis Long Term Equity Fund (G) 8.1 16.3 19.3 19.8 24.1
Reliance Tax Saver (G) 8.9 19.8 33.0 19.9 23.0
HDFC Tax Saver (G) 9.8 18.9 38.4 14.5 19.0

*Returns over 1 year are Annualised

Returns are nothing but impressive. You may ignore short-term performance but over the long term funds have done exceedingly well. Investing in ELSS funds thus should be associated with overall ‘financial planning’ and not solely ‘tax planning’. Investments should be aligned to any of your long term goals.

Points to keep in mind…

Before we conclude, here’s few points to keep in mind while investing in Equity Linked Saving Schemes:

  • Start investing in Equity Linked Savings Scheme (ELSS) funds right at the start of financial year itself. Don’t procrastinate.
  • Lock-in of 3 years from the date of purchase. It applies to each individual SIP transaction. For instance, if you would have invested in ELSS funds via SIP mode and first installment was on April 1, 2017 – lock-in for the first installment will be until April 1, 2020, whereas for the next monthly SIP transaction, lock-in will be until May 1, 2020.
  • Potential to give more returns over a long term than traditional tax saving instruments due to equity component. Do remember returns won’t be linear.
  • Capital gains and dividends are tax-free.
  • A good way to start investing in equity markets and master the art of systematic investing to create wealth is through ELSS funds.
  • It is highly recommended to invest through Systematic Investment Plan (SIP) and in 1-2 ELSS funds at the start of financial year itself. Don’t clutter your portfolio with too many ELSS funds. Continue with the same funds via SIP if the fund is performing well.
  • Different ELSS funds have different investment mandate. So do read offer document carefully before investing as to risks associated with them and choose fund as per your risk profile. All ELSS funds are not the same. For instance, Reliance Tax Saver is known to take concentrated bets in small and mid-cap space to generate higher returns. So relatively risk is high which some investors may not be comfortable with whereas some will.
  • In ELSS funds category too, a fund may have generated marginal high returns as compared to another fund in the same category but by taking a relatively high risk. So high returning mutual funds should not necessarily be the best funds to invest.
  • Don’t be in a hurry to pull money out of ELSS funds after lock-in is complete. Stay invested and continue your SIP.
  • Don’t switch ELSS funds every year based on short-term underperformance. Look for consistency in the fund performance over an extended period.
  • ELSS have relatively short lock-in than other tax saving instruments like Public Provident Fund.
  • Keep track of the fund returns on 6-8 months basis.
  • ELSS funds are just like any other equity funds. So returns will not be linear.
  • Start investing in ELSS funds as soon as you start earning. Investment in these early years ( how small that SIP amount may be) will be a masterstroke (in terms of eventual corpus generated) which you will realize 10-15 years down the line. Not starting investing in equities in our 20’s is a big mistake which majority of us do and then repent later.
  • Opt for Growth option rather than dividend option. Ultimately we are here to create wealth.
  • Three years of lock-in provide the fund manager with flexibility to invest in scripts for a relatively long term without worrying about redemption.
  • You can initiate a lump-sum investment in ELSS funds anytime.
  • There is no upper limit to invest in ELSS funds. However, you will get the tax deduction to a maximum of 1,50,000 under Section 80C.
  • There is no predefined guaranteed return in ELSS funds as it happens with PPF and NSC.
  • There is nothing wrong with any financial product. It solely depends on which investment option investor wants to opt for to achieve their goals.
  • Investors need to understand that ELSS funds returns will outperform other debt funds over a long term.
  • There is nothing like which ELSS fund to invest in the year 2017? Keep investing in your existing ELSS funds as you have been doing without an urge to buy new funds every year.

Do share with us and our readers in case you decide to invest in Equity Linked Saving Scheme during this financial year.Such an investment now will do a world of good to your portfolio in the future. Do write to us in case you have any apprehensions about Equity Linked Savings Scheme and we will try to address them to best of our knowledge.

Disclaimer: Above article is for investor education purpose only. This article is based on my experience with equity investing and ELSS funds in particular. There is no recommendation here for any financial product. Please consult your financial advisor before taking any financial decision. Mutual Fund investments are subject to market risks, read all scheme related document carefully.

2 Responses

  1. Phillips says:

    Could you please elaborate on the effect of the new LTCG tax on ELSS. Does it affect the prominence of considering ELSS as my best long term savings plan.

    • Salil Dhawan says:

      Hello Philips,

      I have heard and read about a lot of hue and cry about the impact of LTCG on equities including mutual funds.
      ELSS funds have a lock-in of 3 years. As far as the impact of LTCG on ELSS funds, they will be taxed like other equity funds.
      I firmly believe ELSS funds are still one of best investments from returns perspective over a long-term (post-LTCG also). Investors should consider ELSS as significant investment options and not just to save tax. If you see wealth created by some of the funds such as Aditya Birla Tax Relief 96 or an HDFC Tax Saver or a Reliance Tax Saver – it’s phenomenal. So investors should keep investing as they were before LTCG came into existence.
      Yes, past performance is no guarantee of future returns but it is no brainer that equity over a long-term will give much higher returns than fixed instruments and ELSS plays a significant role in one’s portfolio.

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