Friday, 22 July 2016

ELSS V/s Other Tax Saving Products - The Game of Real rate of Returns

Traditionally, our investments start to save tax under section 80 C, which includes PPF, Life Insurance, Bank Deposits etc. By doing this, are we making the right selection of an asset class that can help us beat Inflation ?? 

The answer is NO....

The illustration below is self explanatory wherein Equity Linked Saving Schemes (ELSS) which is also a tax saving scheme, has given the best possible real rate of returns (Gross Returns -  Inflation).

While comparing with PPF, the lock-in in ELSS is just 3 years, wherein in PPF on needs to wait for 15 years for maturity. The historical returns in ELSS have been over 15% or more whereas in PPF the returns have been going down and today it is 8.1%.

PPF (Public Provident Fund)ELSS (Tax Saving Funds)
PPF is very safe, backed by Goverment of India.ELSS invests in equity(stocks). So, it's volatile and risky by nature.
Return is also fixed @ 8.7% (Annual)You can expect 15% or higher returns (Annual)
Tax exemption : EEETax exemption : EEE
Lock in period : 15 years 
(Partial withdrawls can be made after 5th year)
Lock in period : 3 years.
Maximum duration : 15 yearsThere is no such limit.
One can deposit (upto 1.5L) a year in 1 to 12 installmentsNo such limits, however, the section 80C limit(1.5 L) will be applicable for claiming deductions
Better suited for risk averse investor who wants an assured return of 8.7%.Better suited for young investor who can take risk and aim for a higher return (15% or more)

To share an example :: 

Had an investor invested 70,000/-per annum in PPF since 1999-2000, and 70,000 per annum in ELSS fund of HDFC ,

The wealth created in PPF account = Rs. 25,02,501 after 15 years

The wealth created in ELSS = Total No. of Units * NAV

23410 * 276.85 = 64,81,058/- 

The investment in ELSS would have given almost 2.5 times returns than in PPF. 

ELSS is an instrument which helps you save tax and helps in long term wealth creation.

Jago Investor Jago

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