Investors must know that the ELSS investment requires some amount of market risk
Investments in an equity-linked savings scheme (ELSS) of a mutual fund have yielded higher returns compared to other instruments like PPF and NSC over the past few years.
According to a research by Crisil ELSS gave 26 per cent and 22 per cent annualised returns over three and 10 years, espectively, vis-a-vis 8-9 per cent offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC).
It said interest on employees provident fund (EPF) for 2011-12 was slashed to 8.25 per cent from 9.5 per cent in the previous year and thus ELSS can act as a strong alternative to investors.
Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns in the long run.
PPF accounts fetched 8.12 per cent over the last 10 years and in the similar period, the NSC gave an interest of 9.10 per cent. The average inflation over the past 10 years stood at 6.05 per cent.
"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed Nifty 500 across three and 10 years. With average inflation around 7 per cent over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14 per cent, which is significantly higher than returns offered by other tax saving products," Crisil senior director Mukesh Agarwal said.
The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.
"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns," it said.
"Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and Fixed Income Research Jiju Vidyadharan said.
It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.