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January 29, 2018

ELSS - an optimum way to save tax and build wealth over the long term

The equity asset class has been in a sweet spot in recent years with the S&P BSE Sensex returning nearly 13% CAGR in the past four years ended January 15, 2018. On the other hand, interest rates on fixed income tax-savingsinstruments have been declining in recent years. For instance, the interest on the popular public provident fund (PPF) has fallen from 8.7% in 2014 to7.6% today. The real or inflation-adjusted return on these instruments is barely enough to meet an individual’s wealth-creation needs. Hence, when itcomes to tax planning, it is remunerative to choose equity instead of traditional debt-based tax-saving products in the long term. Equity-Linked SavingSchemes (ELSS) that are eligible for Section 80C deductions not only help to save tax but also build wealth.

 

ELSS helps in harnessing power of equity

 

Equity is one of the best wealth creation avenues available to investors overthe long term. The asset class as represented by the market benchmarkS&P BSE Sensex has returned, on average, 15% CAGR for a 15-year holdingperiod since its inception (1979). ELSS allows investors to harness thispower of equity. However, investors should note that despite the fact thatthis product has the lowest lock-in period among tax-saving products underSection 80 C, it would be optimum for investors to retain their investmentsover the long term. This not only reduces the volatility associated with theasset class but also provides an optimum return solution for investors(chart). The ELSS category as represented by the CRISIL – AMFI ELSS FundPerformance Index has returned 19% CAGR, on average, in the 10-yearrolling period since June 2001 (inception date of the index).