Tax Saving Mutual Funds (or ELSS)

Tax Saving Mutual Funds (or ELSS): Grab them with both hands before they go away

One of the best tax saving instruments available today might not be available 2 years from now. You guessed it right; I am talking about “ELSS or Tax Saving Mutual Funds”. 
 

Imagine a product that helps you save tax, has a minimum lock-in of a mere 3 years, has given average annualised returns of 15 to 18% pa consistently over the past decade and offers lot of flexibility & above all is tax-free. You should not miss this product for anything. Now this product is available only till Mar 31, 2012. Read further…..

In the recently announced Direct Tax Code 2010, the FM has removed most investment avenues available today u/s 80C like ELSS, ULIPs, NSC, KVP, 5 year Bank FDs & even Senior Citizen Savings Scheme (SCSS). All insurance plans except for Term Plan are out. After April 1, 2012, under the DTC 2010, only the following 4 instruments would be available to save tax u/ch VI; namely; 1. All forms of Provident Funds (PPF, EPF & GPF) 2. The New Pension Scheme ( NPS) 3. Pure Term Insurance Plan (without any Investment component) 4. Any other Govt. approved fund

As is clear from the above, most investment avenues available today u/s 80C will not be available under The New Direct Tax Regime starting from April 1, 2012. And one of the most profitable investments amongst these is ELSS or “ELSS or Tax Saving Mutual Funds”. Have a look at the table below where we have compared the performance of the 10 top performing Tax Saving Mutual Fund schemes with other investment avenues like PPF, Bank FDs & Insurance plans over a 5 year period. 

Tax saving Mutual Funds (ELSS)	Actual Returns over various periods				Value of Rs. 1 lac invested 5 years ago
	1 Year (%)	2 Years (%)	3 Years (%)	5 Years (%)
ELSS Scheme 1	33.3	31.5	18.6	21.6	266,088
ELSS Scheme 2	19.2	20.7	13.7	21.2	261,309
ELSS Scheme 3	37.7	37.7	19.3	21.0	258,839
ELSS Scheme 4	40.9	29.1	13.8	20.0	248,728
ELSS Scheme 5	27.4	21.6	7.0	19.1	239,841
ELSS Scheme 6	32.0	23.2	12.5	18.9	237,135
ELSS Scheme 7	22.5	17.4	7.2	17.9	228,098
ELSS Scheme 8	22.4	17.4	7.2	17.9	227,905
ELSS Scheme 9	44.1	31.1	11.8	17.8	226,555
ELSS Scheme 10	36.3	22.2	10.2	16.4	213,864
Average	31.6	25.2	12.1	19.2	240,385
Maximum	44.1	37.7	19.3	21.6	266,088
Minimum	19.2	17.4	7.0	16.4	213,864
PPF	8.0	8.0	8.0	8.0	146,933
Bank Fixed Deposits	7.5	7.5	7.5	7.5	143,563
Insurance - Money Back & Endow.	6.5	6.5	6.5	6.5	137,009

The best performing Tax Saving mutual fund has given a performance of 21.6% per annum year on year for the past 5 years & the average performance of top 10 tax saving mutual funds is 19.2% per annum. Even the worst performing tax saving fund has given annual returns of 16.4% pa over last 5 years. Now compare the performance of Tax Saving mutual funds with other tax saving instruments like PPF, 5 year Bank FDs & traditional insurance plans like money back & endowments. The table below gives the value of Rs. 1 lac today had you invested in these avenues 5 years back.

ELSS Scheme	5 Years (%)	Value of Rs. 1 lac invested 5 yrs. ago	Current Value times your investment
Best Performing Tax Saving mutual Fund (ELSS )	21.6 % pa	266,088	2.66x
Average performance of ELSS Schemes	19.2 % pa	240,385	2.40x
Worst Performing Tax Saving mutual Fund (ELSS )	16.4 % pa	213,864	2.13x
PPF	8.0 % pa	146,933	1.46x
5 year Bank Fixed Deposits (FDs)	7.5 % pa	143,563	1.43x
Insurance - Money Back & Endowment Plans	6.5 % pa	137,009	1.37x

As is clear from the table above, if you had invested Rs. 1 lac 5 years back in the top performing tax saving mutual fund, current value of your investment would be Rs. 2.66 lacs; a return of 2.66x times. Even the worst performing tax saving mutual fund has given a return of 2.13x times. Compare this return to a PPF or Bank FDs or insurance plans where the return is 1.46x times, 1.43x times & 1.37x times respectively.

Other Advantages of Tax Saving Mutual Funds or ELSS:

1. After the abolition of Entry Load wef Aug 1, 2009, you do not pay any commission to your mutual fund agent. As a result, entire amount of your investment gets invested in mutual funds. Compare this with a ULIP plan where you pay as high as 20 to 40% commission to the agent for no additional benefit at all. 2. You can invest in tax saving mutual funds or ELSS in 2 ways or a combination of these; a) you can invest lumpsum amount at one go anytime within the financial year & b) you can start a Systematic Investment Plan (SIP) in any tax saving mutual fund scheme of your choice or c) you can invest via a combination of the above two. 3. There is a mere 3 year lock-in in tax saving mutual funds or ELSS. This is the minimum lock-in period amongst all tax saving instruments u/s 80C.

Tax Saving Instrument	Expected Return (%)	Lock-in period (Years)
Public Provident Fund (PPF)	8% pa	15 years; partial withdrawal from 7th yr
NSC , KVP etc.	8% pa	6 years
5 year Bank FDs	6.5% pa	5 years
ULIP*	12 to 15% pa	5 years
Insurance Plans	6 to 7% pa	Depends; min 5+ years
Tax saving Mutual Funds or (ELSS)*	15 to 18% pa	3 years

*market linked; average performance over past years

4. There is zero tax on capital gains from tax saving mutual funds or ELSS4. There is zero tax on capital gains from tax saving mutual funds or ELSS

Also, the DTC 2010 comes into effect from April 1, 2012. This article is written in Sep 2010. We thus have exactly 18 months to invest in Tax saving Mutual Funds (ELSS). After that, this wonderful tax saving instrument would no more be available. Or in other words, you have only 2 Financial Years left (FY 2010-11 & 2011-12) to invest in this instrument.

Starting April 1, 2012, under the Direct Tax regime, as already discussed earlier in this article, there is hardly a equity linked instrument available that has a successful history of giving double digit returns. we shall therefore be forced to invest in a PPF, or a NPS or buy a Term plan to save tax. so postpone your traditional investment by 2 years & invest the maximum possible amount for the next 2 financial years in Tax saving Mutual Funds (ELSS).

Just one caveat. There are around 27 Tax saving Mutual Funds (ELSS) available in the market today. Not all of them are performing well. So please consult a Mutual Fund Expert (your next door distributor/agent might not be the best guy) to help you choose the best Tax saving Mutual Funds (ELSS) schemes for you.

Happy Investing!