The Rs 1,58,199.6-crore equity linked savings scheme (ELSS) category, popularly called tax-saver funds, disappointed investors in 2022 by giving a meagre return of 1.9 per cent. As we enter the last quarter of the year, and salaried employees scramble to submit evidence of their tax-saving investments, a large number will ask whether investing in ELSS is a good idea after their recent abysmal performance.
Strong long-term track record
The ELSS category is purely equity oriented. And equities have the potential to offer higher returns than debt products over the long term. ELSS funds have given a category average return of 13.7 per cent over the past 10 years. Debt-oriented tax-saving products can’t give such high returns. “As they are professionally managed funds, they have the ability to create wealth, or at least generate inflation-beating returns over the long term,” says Umesh Kumar Mehta, chief investment officer (CIO), Samco Mutual Fund (MF).
Investors have to pay capital gains tax when they redeem these funds: 10 per cent on long-term capital gains above Rs 1 lakh, and 15 per cent in case of short-term capital gains. Even then their post-tax returns are likely to surpass that of debt-oriented tax-saving products over the long term.
Another advantage is their short lock-in. “ELSS has the shortest lock-in period among all Section 80C instruments,” says Mehta. The lock-in of three years works in favour of investors who tend to exit equity funds at the first sign of a downturn.
Investors can enjoy tax deduction of up to Rs 1.5 lakh under Section 80C by investing in ELSS.
Be prepared for volatility
Investors must, however, be prepared for periods of volatility. In the past 10 calendar years, there have been four —2015, 2016, 2019 and 2022—when their category average return was in the single digit. It was negative in 2018.
“Since these funds invest in equities, returns are not assured,” says certified financial planner Parul Maheshwari.
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First Published: Thu, January 05 2023. 18:21 IST
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