Equity Linked Saving Schemes

Financial Services

What are ELSS Funds?

Equity Linked Saving Schemes (ELSS) is an investment option that provides tax saving benefits as well as capital gains. Now, the investor can invest in ELSS Rs. 1, 00,000/- under Section 80C. These schemes possess a lock-in period of three years. So the portfolio that a fund manager has will have stocks which can outperform over a period. Hence the investor is benefited the most as he gets good returns by investing periodically.

Reason for choosing ELSS

  • Money is invested over a longer period as the ELSS funds have a lock-in period of three years.
  • Better returns are achieved as the investment in equity is over a long-term and it prevents from unnecessary withdrawals
  • Apart from tax savings, the investor receives Capital gains or high returns
  • Small amount even Rs.500 can be invested in ELS through SIPs
  • Involves less risk - Investing in ELSS, one cannot run away from equity market risk as equity market is very volatile and fluctuating. One option to minimize risk is to invest in Diversified funds and another option is to trust the fund manager for SIP.
  • Dividends that are earned are tax free

Systematic Investments Plan (SIP) in ELSS

This is very beneficial for an investor as one can invest as low as Rs.500/- per month in ELSS through Systematic Investment Plan.

The theory of SIP is that it makes sure that the investor buys more when the market is declining and buys less when the market value is rising. The main reason behind the success of SIP route is that is an investor does not want to buy when the market is falling, he can back out from the market, this will not get the investor to average his price.

Investor who has faith in SIP always lands up in profit. As a human psychology, one will not buy when the market is falling and he might end up buying more when the market is at peak. This results in him buying at high rate and selling at low rate and thus he ends up in loss. So one should continue with SIP irrespective of the market rise and fall.

Risks in ELSS Funds

  • Mutual Fund Problem - The Fund Manager is a human being and can do mistakes. He might not always select best stocks.
  • Commissions - Fund Manager is trying to help the investor so obviously he will charge some commission. Even if the Fund Manager makes the investor invest in the best funds, the investor has to pay high commissions and thus reducing the profits.
  • A Fund Manager cannot perform better than the market. He might miss out on one year and if that happens to be the last year, maturity money will be reduced. Investor might invest less amount every year but he has to pay commission to the Fund manager and there is no guarantee that he will perform better next year.
  • Apart from the Fund Manager the Investor also has to learn the market changes. He should be able to do profit and loss calculations.
  • Investor might land up in the worst performing ELS Scheme. In that case the investor might not be interested in tax savings and capital gain, he would want his principal amount to be given back.
  • There is always a risk involved when the market goes down.

Five ELSS which are booming are:

  • Franklin India Tax shield
  • HDFC Long Term Advantage (Earlier HDFC Tax plan 2000)
  • HDFC Tax Saver
  • Prudential ICICI Tax Plan
  • Sundaram Taxsaver

Advantages of ELSS over NSC and PPF

  • Maturity period of NSC is 6 years and PPF is 15 years while that of ELSS is 3 years. So with a lesser lock-in period, one can withdraw the amount
  • Earning potential is very high as it is equity linked scheme.
  • Investor gains money during the lock-in period and he also have the option of dividend.
  • Systematic Investment Plan is a part of ELSS.
  • Accident death cover insurance is covered in some ELSS funds.
  • NSC and PPF gives return of 8% and ELSS gives return of 30-40%.