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The many advantages of ELSS funds

ELSS funds are an advantageous way to use the Rs 1.5 lakh limit for tax saving investments under Section 80C


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The Many Advantages of ELSS Funds

Under Indian tax laws, savers have a complete range of tax saving instruments available to them. And yet, individuals often take sub-optimal investment decisions with their tax-saving investments. Deposits with long lock-ins that hardly pay anything more than inflation; insurance schemes that eat away a lot of the gains in agent commissions; Equity linked Savings Schemes (ELSS) of mutual funds chosen with scant regard to performance track-records--all these (and more) are often seen when it comes to tax-saving investments.

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Why does this happen? One common reason is that there is a confusion of goals between saving tax and making investments. The typical investor makes this decision either in late March under the duress of having the deadline slip by, or under intense pressure by a salesman who drives home the fact that time is running out. At the end of the day, we make suboptimal investment decisions and when they ever realise it, they console themselves by saying that that at least they got tax benefits for the investments.

This duality of concern--tax as well as investments--prevents clear-headed thinking about just exactly what one is getting out of an investment and whether the quantum of any disadvantages are actually worth the quantum of tax benefits that are being obtained. Investors should work on eliminating both these sources of poor decision-making--time pressure as well as not thinking about these investments as investments.

Eliminating time pressure is simple--just plan these investments as early in the year as possible--if you haven't done so, then this is the right time to do so. And once you start in time, there's no need to stop for next year. Since the best way to invest regularly in a fund is through an SIP, you should just start an SIP in a carefully-chosen ELSS fund and let it run for a long duration.

These investments are investments and should not be made if you would not make them otherwise. For example, if you otherwise do not need to make a fixed deposit but would rather invest in equity, then do so in your tax-saving investments as well. Any investment has to first make sense as an investment, and only incidentally be a tax-saver.

Within this framework, ELSS funds are an advantageous way to use the R1.5 lakh limit that is there for tax saving investments under Section 80C. This limit has been sharply enhanced in FY 14-15 than it was earlier, but, for many people, a good part of it gets consumed by statutory deductions.

Unfortunately, all the statutory deductions are invested into fixed income instruments Now, the Government has even placed some tax deductible expenses under Section 80C.

Within this limit, ELSS is the better way to get the advantages of equity investing.

This article first appeared in January 2015.

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