A query on the ways to save income tax often elicits standard responses: Invest in Post Office savings schemes. Invest regularly in the public provident fund. Or, buy some insurance policies.
Rarely would you find someone who would advise you to buy units of an equity-linked savings scheme.
It is a pity that investors do not yet comprehend the potential benefits in this lesser known, high-yielding product. ELSS offers some great advantages.
The first advantage is that it is the only equity-based tax saving instrument available in the country today. It offers a tax rebate of 20 per cent on investments up to Rs 10,000 under Section 88 of the Income-Tax Act.
Equity, as the pros would say, has always proven to be the best asset class in the long term. So if you are in for the long haul, it is important to invest in an asset that will beat inflation.
With a strong growth rate in the economy and a healthy rise in corporate earnings, equities should be able to trump inflation comfortably over the next few years, say experts.
ELSS is structured like open-ended equity funds. So you can invest at any time of the year. You can use ELSS as a pure investment vehicle too, but if you claim benefits under Section 88, it would entail a lock-in period of three years.
Compared with all the tax planning schemes available today, ELSS has the shortest lock-in period. That is the advantage number two.
These may still not be a good enough reasons for you to invest. So here are some numbers that should make the case more convincing: In the past three years, ELSS have actually beaten its benchmark decisively. As a category, it gave an annualised return on 44.41 per cent, marginally beating the diversified equity funds category.
And then, there are funds that have given breath-taking returns (See table) -- HDFC Long term Advantage gave returns of 65.59 per cent, Birla Equity Plan 56.52 per cent, and Magnum TaxGain 56.52 per cent.
The top 10 schemes:
| 3-year returns in per cent | |
| HDFC Long-Term Advantage | 65.59 |
| Birla Equity Plan | 56.52 |
| Magnum Taxgain | 56.50 |
| Pru ICICI Tax Plan | 55.70 |
| HDFC Taxsaver | 54.22 |
| Tata Tax Saving | 51.17 |
| Sundaram Taxsaver | 49.76 |
| Principle Tax Savings | 48.75 |
| Libra Taxshield 96 | 45.07 |
| Franklin India Taxshield | 42.48 |
There are some more reasons to believe that over the long term, ELSS would do better than plain vanilla open-ended diversified funds.Fund managers said that due to the lock-in period applicable on investor's funds, ELSSs tend to have a more stable corpus. This helps in more that one way.
The fund manager can pick up stocks that may score a bit low on liquidity but are available at substantial discounts and wait for the value to get unlocked.
The fact that the fund manager need not grapple with redemption pressure every day means he can remain fully invested in equities. Other fund managers hold a portion in cash, which yield low or no returns.
But there is one caveat: Even as equities provide high returns over the long term, it is a risky asset class. It is prone to volatility.
If the stocks markets get caught in a bear grip, you may have to wait for years to make money. But the probability of that happening is low. The best way to invest in equities, as also, ELSS is to buy shares/units worth a fixed amount of money every month. In other words, invest systematically.