What is ELSS?
ELSS is a type of diversified Equity mutual fund (MF), which is qualified for tax exemption under section 80C of the Income Tax Act. Since it is an equity fund, returns from an ELSS fund reflect returns from the equity markets.
Growth or Dividend Option?
ELSS funds have both Dividend and Growth options so investors in a dividend scheme, get dividend income, whenever dividend is declared by the fund, even during the lock-in period.
For Example: Reliance Tax Saver Fund has generated cash flow through dividends and the scheme has given a dividend of Rs. 13.86 per unit on the face value of Rs. 10 per unit, since inception. The scheme has given 16 dividends in last 15 quarters.
These dividends come from the funds’ NAV (net asset value).
Dividend option could be useful to investors who need regular income whereas Growth option would be useful to investors who are seeking long term appreciation and wealth creation.
In Growth option investors can withdraw lump sum amount on the expiry of 3 years lock in.
Why should one invest in an ELSS?
ELSS funds are one of the best avenues to save tax under Section 80C. This is because along with the Tax Savings, the investor also gets the potential upside and Growth of investing in the Equity Markets.
Also, No Tax is levied on the Long-Term Capital Gains and Dividends from these funds.
Moreover, compared to other tax saving options (ULIP/Insurance, Fixed Deposit etc), ELSS has the shortest lock-in period of three years.
Selection of ELSS Funds
Before investing it is very important that an investor gives enough time to do proper research before investing and go through the KIM, SID and Offer document as all investments are subject to market and credit risk.
Investor should avoid judging schemes on the basis of short-term performance and it is advisable to invest into schemes that have long term performance track record of atleast 3 to 5 years and longer the track record available better for investors to study the same.
Also, while ELSS has got 3 years of Lock In however it is always better if an investor stays invested in the fund for long run and thus there is no need to pull the money out if the scheme is performing well. Also, since ELSS invests in equity, you should be prepared to stay invested for at least five to seven years.
For Example : Since its inception Reliance Tax Saver (ELSS) Fund has given a CAGR return of 15% p.a. (as on 30 November 2016) so Rs. 1 lac invested at the time of inception is worth Rs. 4.85 lac in the scheme compared to Rs. 3.24 lac in the Benchmark.
Similarly one can do analysis of other mutual fund schemes and basis which with the help of their financial advisor they can choose the funds for investment.
Some of the Mutual Fund schemes in the market and their performance.
|Name of Scheme||3 Year Returns||5 Year Returns|
Reliance Tax Saver Fund
|DSP Black Rock Tax Saver Fund||22.76||20.71|
|Birla Sunlife Tax Relief 96||21.78||19.89|
|Franklin India Tax Shield Fund||21.04||17.94|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||18.86||17.93|
|Past Performance Is No Guarantee of Future Results. Data compiled on 23.01.2017.|
|Source: InvestmentGuruIndia.com and Valueresearchonline.com|
Expense ratio states how much you pay a fund in percentage term every year to manage your money. But the Securities & Exchange Board of India has stipulated a limit that a fund can charge. However it is important in long run to know and go through the Expense ratio that is charged by funds as it could affect the returns.
|Name of Scheme||Expense Ratio|
|Reliance Tax Saver Fund||2.00|
|DSP Black Rock Tax Saver Fund||2.59|
|Birla Sunlife Tax Relief 96||2.29|
|Franklin India Tax Shield Fund||2.48|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||2.31|
|Data compiled on 23.01.2017.|
Finally, investors are advised to consult their financial advisor before investing so that they can get complete picture of the scheme however the financial advisor should have completed all certifications as prescribed by SEBI and AMFI.
Disclaimer- Please note investment in Mutual Funds/ ELSS is Subject to Market Risk and please read the offer document carefully before investing in the same.