Topic 4: ELSS: BEST TAX SAVING OPTION

There are several products eligible for availing tax benefits under section 80C. These products range from life insurance policies to equity-linked saving schemes (ELSS). Most investors consider investing in National Saving Certificate (NSC) or Public Provident Fund (PPF) as they are government-backed and offer assured returns.

Any investment that offers assured returns and has low risk tends to offer moderate returns. On the other hand, investments in ELSS schemes can generate higher returns at a higher level of risk. ELSS schemes are equity mutual funds, thereby can be volatile. These schemes invest across market capitalization and have a lock-in period of 3-years.

The NSC, a post office savings product, is a fixed-income investment scheme offering an interest rate of 6.8% p.a. compounded annually with a lock-in of 5- years. The PPF is also a fixed-income investment product offering an interest rate of 7.1% p.a. compounded annually with a lock-in of 15-years.

For an apple to apple comparison, we evaluate the rolling returns of 5-years, 7-years, and 15-years of ELSS schemes vis-à-vis returns offered by NSC and PPF

For a holding period of any 5-years from 2000-2022 (month-end), the average performance of all ELSS funds stands at 15.2%. Over this period, almost 81% of the time, these ELSS funds have given returns more than 8%, beating the returns offered by both NSC & PPF. Also, only 2.7% of the time, these ELSS funds gave negative returns for a 5-year holding period. Thereby, an investor with an even moderate risk appetite can consider investing in ELSS funds over other secured investments given the potential upside these funds have to offer (average of 15.2% CAGR, and generated more than 10% returns 72.5% of the time).

Similarly, when we look at a holding period of 7-years and 15-years, the case for investing in ELSS funds over NPS and PPF only becomes more robust

To further reduce the risk, we recommend investing in 2-3 ELSS schemes. Based on our fund selection process that considers performance and fund management aspects, below is the list of our recommended ELSS schemes.

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