Equity-linked Savings Schemes, or popularly known as ELSS, are diversified equity mutual fund schemes that invests majority of its corpus in equities and investments in such schemes are eligible for tax exemption under Section 80C, as per current applicable tax laws, with a lock-in period of 3 years.
What makes ELSS Superior to other Tax-Saving options?
|Lock-in period||15 Years^||6 Years||5 Years||3 Years|
|Taxation of Interest/Gains||Tax free||Taxable at applicable slab||Taxable at applicable slab||Tax free|
|8.5 ~ 8.8%||8.6 ~ 8.9%||9 ~ 9.5%||Market-linked|
|^ option of Partial Withdrawal after 6 years|
Unique hidden advantage of ELSS
In addition to the above comparative advantages, ELSS offers TWO very unique and hidden advantages that can help an individual to experience the benefit of investing in financial-markets linked instruments and generate Real Returns on Savings over long term.
ELSS makes a perfect entry product where an individual can get the first taste of equity-investing as-well-as of mutual funds with tax-saving as an added advantage.
Built-in feature of 3-years lock-in shields the individual from irrational actions based on Greed and Fear mindset helping him to ride the short-term volatility
3-Year Lockin does not mean that you MUST exit at 3-Years
ELSS schemes are pure equity-based investment products, 3 years is certainly not the correct timeframe from risk-reward perspective.
Real advantage of 3 years lock-in is its ability to help you ride the short-term volatility of equites and certainly not to exit after 3 years as is being represented and pitched by majority of the sales channels offline or online.
|Time-horizon||Capital Loss Probability||Probability to beat post-tax FD returns *||Probability to grow your money by 12% + CAGR||Risk Reward Scenario|
|3 Years||8%||80%||60 ~ 65%||
You need to be lucky!
– Market sentiment and your luck plays important role.
– Good potential to beat post-tax FD returns.
– Be-ready for loss of principal too
|5 ~ 6 Years||0%||95% +||70 ~ 75%||
Much Better than just being lucky!
– Extremely favorable risk-reward proposition to beat post-tax FD returns
– Reasonably good potential of 12% + CAGR growth.
– Difficult to loose principal
You will always be a Winner!
– Extremely favorable risk-reward proposition of 12% + CAGR growth
– Beating post-tax FD returns is almost a certainity
– Difficult to loose principal
|* Assuming 9.25% avg. pre-tax returns on Fixed deposits and 30% tax-slab
** Above analysis is based on historic performance of our shortlisted schemes for the specified time-horizons calculated on a daily-rolling basis over the entire duration of scheme existence
For ELSS, being an equity-oriented product offering, setting longer time-horizon as an objective will be extremely rewarding as you always have an option to book expected profits early anytime after 3 years, whereas,
if you start with lets say,3 years time-horizon mindset, you are likely to be disappointed if things didn’t go well as either you end-up booking loss or extending the time-horizon at that time.
Importance of Right Execution and How we can help?
After setting right expectations wrt time-horizon and related risk-reward situation, focus on “right execution” is equally important for a happy and successful investing experience.
(1) Identifying right schemes that have demonstrated consistent performance across market cycles will certainly add predictability with enhanced risk-reward proposition
(2) Post lock-in monitoring and tracking of schemes performance also plays a significant role from a long-term perspective.