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A Comparision of returns given by ELSS funds

Equity linked savings scheme (ELSS) can give you the ideal combination of wealth creation and tax saving. Let us compare returns of various ELSS schemes with the benchmark and with other financial products.
Comparison of returns given by ELSS

There are some people whose primary aim is to create wealth, and then there are some people whose primary aim is to save taxes. What if you can invest in a financial product that can give you both? Yes, we are talking about equity-linked savings scheme (ELSS) funds that can give you the ideal combination of wealth creation and tax saving. This article will focus on the comparison of returns given by various ELSS mutual funds. We will compare returns of various ELSS schemes with the benchmark and with other financial products.

Who should invest in ELSS?

Since an ELSS invests a minimum of 80% of its money into equity shares, it is important for an investor to understand their risk profile before investing in an ELSS. Aggressive investors with an appetite for high risk should invest in an ELSS. Conservative investors or those with moderate risk appetite should avoid investing in an ELSS.

Factors to consider while investing in an ELSS

There are various factors that an investor should consider while investing in an ELSS. Some of these include:

  1. Investment time horizon
    An ELSS invests a minimum of 80% of its money in equity and equity-related instruments. Equities can be volatile in the short term. Hence, you should consider investing in an ELSS only if your investment time horizon is five years or more.
  2. Lock-in period
    An ELSS has a lock-in period of three years. During these three years, you will not be able to make any part or full redemption of your ELSS investment. Also, if you are investing through a systematic investment plan (SIP), you should note that each SIP installment will have a lock-in period of three years. So, you should consider the lock-in period before deciding to invest in an ELSS.
  3. Tax benefits
    Investments in an ELSS funds qualify for a deduction under Section 80C of the Income Tax Act. The maximum deduction that an individual can avail of is up to Rs. 1,50,000 in a financial year.
  4. Risk appetite
    As discussed earlier, only those investors with an aggressive risk profile, who have an appetite for high risk, should invest in an ELSS.
  5. Return expectation
    While ELSS comes with high risk, it also has the potential to give inflation-beating high returns. In the past, ELSS has given higher returns than many other financial products.
  6. AMC background and returns given in the past
    Before investing in an ELSS, you should read about the asset management company (AMC), the promoters, the fund manager, the various schemes managed and the returns given, etc.

Comparison of ELSS returns

Now that we understand the factors to consider while investing in an ELSS let us look at the returns given by some of the best-performing ELSS funds.

Scheme nameAUM (Rs. crores)1 year3 years5 years
Quant Tax Plan36896.87%34.32%24.97%
Mirae Asset Tax Saver Fund9,40071.31%25.16%22.67%
BOI AXA Tax Advantage Fund51275.40%24.31%21.51%
Canara Robeco Equity Tax Saver2,67966.76%24.86%19.98%
Axis Long Term Equity Fund33,87172.67%22.27%19.46%
Nifty 50 IndexNA60.11%16.90%15.07%
Nifty 100 IndexNA62.69%17.95%16.25%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/elss.html)

Note: The returns are as of 23 September 2021. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on the last five-year returns.

As seen in the above table, all the top five ELSS schemes have given higher returns as compared to the Nifty 50 Index and the Nifty 100 Index on a one, three, and five-year basis.

Comparison of returns: ELSS mutual fund Vs other financial products

Apart from ELSS mutual funds, other financial products that qualify for deduction under Section 80C of the Income Tax Act include Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year Post Office Time Deposit. People usually compare the returns of these financial products with the returns of ELSS to decide on which financial product to invest in.

The risk profile of all the above financial products is different from that of ELSS. All the above financial products are debt products, whereas ELSS is an equity product. So, an apple-to-apple comparison of returns is not possible. 

Comparison of last 5-year returns

  • Public Provident Fund (PPF): 7.1 – 8.7% p.a.
  • National Savings Certificate (NSC): 6.8 – 8.5% p.a.
  • 5-year Post Office Time Deposit: 6.7 – 8.5% p.a.
  • ELSS: 19.46 – 24.97% CAGR

As can be seen in the above section, ELSS funds has given much higher returns than other tax-saving financial products like PPF, NSC, etc.

How to use ELSS for goal-based financial planning

In the above section, we saw how ELSS has given higher returns as compared to other tax-saving financial products. Investors can use ELSS for goal-based financial planning to accomplish various goals, such as building a corpus for child education, child marriage, retirement, etc.

Let us understand this with the help of an example. Manish wants to accumulate Rs. 50 lakhs for his daughter’s higher education. He will need the money after 18 years. If Manish invests Rs. 80,077 annually (monthly SIP of Rs. 6,673) in an ELSS and expects a return of 12% CAGR, he will be able to accumulate Rs. 50 lakhs in 18 years.

Over long investment horizons, we can expect ELSS to give inflation-beating high returns. We have seen how the top-performing ELSS schemes have given returns in the range of 19.46 – 24.97% CAGR over the last 5 years. In our example, we have assumed a lower return of 12% CAGR. Let us see how Manish’s goal-based financial plan will look like.

As seen in the above chart, if the ELSS gives an expected return of 12% CAGR, Manish will be able to accomplish his goal of building a child higher education fund of Rs. 50 lakhs in 18 years. Similarly, you can also use the ELSS mutual funds to accomplish your financial goals.

Investing in ELSS with Glide Invest App

In the above section, we saw how you can use ELSS funds for goal-based financial planning. You can partner with the Glide Invest App for your financial planning journey. You will get the recommendations for the appropriate ELSS and other mutual fund schemes based on your risk profile. You will get advice on how to plan and systematically invest towards your financial goals. 

With Glide Invest, you will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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