How to Save Tax Using ELSS Funds

As a collective group, we’re infamous for the last-minute tax-saving frenzy that we partake in at the end of each Financial Year! Needless to say, the last-minute rush leads to a number of regrettable investment decisions too. Usually, tax saving aspirants have flocked to Life Insurance as their preferred tax saving avenue. However, we witnessed a bucking in the trend this year, with close to 1 million (ten lakh) new folios getting created in ELSS (Equity Linked Savings Schemes) funds.

What are ELSS Funds?

ELSS funds are really nothing but a type of diversified equity fund. Equity funds concentrate their investments into equity shares of listed companies, and so their performances are linked to the rises and falls in the equity markers. In that sense, it’s important to keep in mind that ELSS Funds can be quite volatile. However, it’s also worth noting that in the long run, Equity Oriented Mutual Funds such as ELSS have outperformed other traditional asset classes quite handsomely. As a category, their 5-year returns have exceeded 19% per annum as on date – however, this figure might be a bit misleading as we were amid a market low this time back in 2012. The ten-year returns from ELSS funds are more circumspect at 11.35% per annum – but keep in mind that we were in the midst of a euphoric bull market ten years ago today! Eventually, one can expect returns ranging from 12%-15% per annum from ELSS, although non-guaranteed.

Your investments made into ELSS Funds are deemed as tax deductible under Section 80C of the income tax act. Section 80C has a limit of Rs. 1.5 lakhs in a given Financial year, and also encompasses other popular avenues such as your home loan principal, tuition fees for your kids, your PPF investments and your life insurance premiums. If you’re falling short of Rs. 1.5 lakhs after considering all the above stated, you should ideally plug that gap using an ELSS fund.

How do ELSS funds score over other, traditional instruments?

ELSS Funds score over their traditional counterparts (such as Life Insurance of Term Deposits) on two counts. First, they have the shortest lock-in period of three years compared to term deposits (5 years), PPF (15 years) and Traditional Life Insurance (ranging from 10 to 20 years). Second, they harness the unparalleled wealth creation potential of the equity markets, thereby providing investors with the opportunity to create long term wealth from their tax-saving investments rather than getting locked into fixed income investments in the name of safety. Especially for younger investors who can afford to extend their time horizons if their lock-ins expire amidst the throes of a bear market, ELSS Funds make a lot of sense.

How to invest into ELSS Funds

If you’re a first-time investor into Mutual Funds, you’ll need to undergo a simple KYC registration process (Know Your Customer), which entails the signing of a document, and the furnishing of your ID and address proofs. Post that, a simple form and cheque are all that are required. If your Financial Advisor has online transaction capabilities inbuilt into their service offering, a paperless transaction could be initiated as well. For best results, you should ideally compute your 80C gap and stagger your annual required outlay over a period of several months, rather than as a lump sum at the end of the Financial Year. Doing this will not just make it easier on your pocket, but also protect you from the risk of betting your investments on one specific point in the market cycle.