Tax saving mutual funds, also known as ELSS, do come with some volatility, but in the long term they also offer an opportunity to create wealth.
Although we are only a few months away from the closing of the financial year- 2015-16, most of us may have yet to undertake our tax savings investments for this year; we tend to wait till the very last moment, i.e. March, to decide where to invest to avail tax exemption benefits. Due to this last minute investing approach, people are somehow able to save on taxes, but not able to create wealth in the long run. So, is it possible to create wealth along with tax-savings and if yes, then how?
Just to re-cap, you can get tax deduction of upto Rs. 1.50 lakh under Sec 80C of the Income tax, 1961, by investing in the following tax-saving investment instruments listed below (popular list, not exhaustive):
1.Public Provident fund (PPF)
2.Bank Fixed Deposit- 5 Years
3.Life Insurance Policy
4.Equity linked Savings Scheme (ELSS)
Now, let us look at how much tax you can save if you optimize the available investment limit of Rs. 1.5 lakh by investing in any of the above-tax savings investments options:
Amount in Rs.
10% Tax Bracket
20% Tax Bracket
30% Tax Bracket
Income estimates for an individual of less than 60 years of age. As per the present tax laws, eligible investors (individual/ HUF) are entitled to a deduction from their gross total income.
While we are aware of the importance of undertaking these investments in order to save on taxes, let us take a look at where we could invest to create wealth from among these available investments options...
To create wealth, the objective of investment should be to earn positive real returns i.e. beat inflation on a post-tax basis. The following table shows how different investments have fared with respect to earning real returns on a post-tax basis along with other parameters like tenure, liquidity and risk:
*Average returns of last 10 years for ELSS Category as on Nov 30, 2015. ^Tax rate of 30.9%.
As seen from the above table, ELSS as an investment instrument has clearly been a WEALTH CREATOR by generating real returns of 5.29% per annum. However, investing in ELSS comes with its own risk of equity market volatility. On the other hand, returns from PPF, bank deposits and life insurance policies are fixed and stable, but you are not able to create wealth from these instruments. Actually, bank deposits and life insurance policies has been WEALTH DEFLATOR’S as you would have earned negative real returns in the range of 1.13% to 2% p.a. However, PPF has been able to earn positive real returns of 1.70% p.a.
SIP - The best way to invest in ELSS funds: As most of us run around to make tax-saving investments at the end of the year, we invest a large amount at one go in an ELSS fund; this can be risky. Instead, it is better to spread out the investment across the year by starting an SIP in an ELSS fund in April itself.
Value as on 31 March 2015
Lumpsum (Rs. 60,000 invested every financial year from 2010-11 to 2014-15)
SIP (Rs.5,000 per month from April 2010 to March 2015)
Source: Ace MF, Value as on 31st March 2015, HDFC Tax Saver(G)
As seen from the above table, an investor who started investing Rs 5,000 a month in an ELSS fund from April 2010 to March 2015, would have amassed a total of Rs 5.17 lakh. On the other hand, an investor who put Rs 60,000 in the same fund at the end of the every financial year (2010-11 to 2014-15) would have amassed only Rs 4.62 lakh. Hence, the SIP investor made Rs 55,913 more than the lump-sum investor, which shows that SIP is the best way to invest in it.
Public Provident Fund (PPF) Vs Equity Linked Savings Scheme (ELSS)
Consider an example where an investor ‘A’ has invested Rs. 70,000/- p.a. in PPF since 1999, whereas another investor ‘B’, has invested Rs. 70000/- p.a. in ELSS for the same period. Let us see how the investments of both the investors A & B have fared in the last 16 years.
Source: Ace MF, Value as on 31st March 2015, HDFC Tax Saver (G). In NAV, green indicates NAV has gone up and red indicates NAV has gone down.
The below table shows the wealth created by investor A and investor B in the last 16 years in terms of CAGR returns and mentions the number of times by which the return has increased.
Investment amount (in Rs.)
Value as on 31st March 2015 (in Rs.)
Gain/ Loss (in Rs.)
No. of times returns
Hence, in order to create wealth along with savings of tax, one should not ignore investing in equity linked savings scheme (ELSS funds) and more so, one should adopt systematic investment plans (SIP) rather than lumpsum investing.