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Build long-term wealth with equity-linked savings scheme

It is that time of the year where every taxpayer finalises investments for the purpose of saving taxes. As per Section 80C of the Income Tax Act, 1961, an individual/HUF is entitled to a deduction from gross total income up to Rs 1.5 lakhs. There are several avenues available through which one can save taxes like Equity Linked Saving Schemes (ELSS), life insurance, PPF, NSC and bank fixed deposits.

The ‘traditional’ tax-saving instruments give exposure to fixed income instruments and offer a certain guaranteed return. However, the returns generated are barely enough to beat inflation. Hence, there is an ardent need to look at investments which can generate positive inflation adjusted returns in the shortest lock in period. ELSS as a category scores well amongst other instruments in both the aspects. Compared to other tax saving instruments under Section 80C, ELSS has a much lower lock-in period and has the potential of offering superior returns over the long term whilst still availing tax benefits.

ELSS is a mutual fund-scheme category having a three-year lock-in period from the date of the investment and invests majority of its asset in equities without any sector or market cap bias. It comes with both growth and dividend options. The returns as well as the dividend income are tax free. Since these funds are essentially a diversified equity fund, it is subject to market risk and volatility as compared to other tax-saving instruments.

However, equities as an asset class, generate superior returns over the long term and serve as an effective tool to beat inflation. From the perspective of an investor, the lock-in period of the fund enables it to participate in the long-term story of Indian equities. An investor can invest in lump sum or through a systematic investment plan (SIP) route and each investment will be locked in for three years from their respective investment dates.

ELSS or tax saver funds should form part of the core portfolio of an investor whereby over a long-investment horizon, one can not only save substantial amount in form of tax exemption, but also create wealth to meet their long term financial goals such as buying a house, a short trip abroad, children’s education, marriage etc.

Though funds under the ELSS category offer triple benefits like tax savings at the time of investments, capital appreciation and tax free returns to the investor during redemption, they are subject to market risks like other mutual funds. However, they are less risky than sectoral or thematic funds and also funds which have a market cap bias while investing.

Overall, ELSS can be considered over other avenues for building long term wealth.

The writer is head equities, Canara Robeco Asset Management