ELSS - An expensive neglect

“There are two kinds of people in the world – one for whom 14 Feb’15 meant Valentine’s Day and others for whom it means Indo-Pak World Cup Match. “ J

Now imagine a cricket team consisting of 11 Anil Kumbles only, or 11 VVS Laxman ! I hope you got the blunder that I am trying to point out – Imbalance. We need to balance out things in every sphere of life. Same goes for our financial planning in general and more so for our Tax Planning. We discussed in our last article, how Section 80(C) is the most availed and most extensive avenue of Tax Saving. It encompasses a total of 9 methods of Tax Saving within a limit of 1.5 lakhs.

But sadly for most of us Section 80(C) has become synonymous with Public Provident Fund (PPF), that too invested in one tranche when our respective companies ask for Tax Proofs. We hardly bother to explore other avenues, which may prove to be better or more relevant to us than PPF. One such product is Equity Linked Saving Scheme (ELSS). In plain terms it is a Mutual Fund which has a lock in period of three years, which means your money is not liquid for three years (ONLY). ELSS invest their corpus into stock markets.

Now there are number of parameters on which financial planners analyse different financial avenues. I am producing my list of parameters –

• Expected Returns
• Risk
• Liquidity
• Tax Implications
• Minimum ticket size
• Ease of operating

Lets compare PPF and ELSS on these parameters one by one.

1. Expected Returns – While PPF provides an almost constant rate of return, returns of ELSS are unpredictable being linked to equity markets. Definitely any investments into stock are not advisable for short term; ideal horizon for investments into stock markets is at least 3 years. There are umpteen studies that prove that stocks give 12%+ returns if your horizon is for more than 5 years. Returns from investments in stock markets tend to be proportionate with the horizon of investments. Taking in view that investments in PPF are blocked for 15 years, there is negligible probability that ELSS will give lesser returns than PPF if you keep yourself invested for that long period. Here is a comparative study

2. Risk* – Theoretically there is risk imbibed in stock markets investments, but that risk is mitigated by investments in ELSS which are professionally managed by Fund Houses , which typically are backed by financial institutes of very high repute. Additionally high amount of regulations by govt and regulators ensure proper and prudent management of your money. As for PPF, as it is backed by govt , there is almost nil chance of default.
3. Liquidity – this is one parameter where ELSS scores heavily over PPF. While money in PPF is blocked for 15 years, it is only blocked for 3 years in ELSS. That doesn’t mean you have to withdraw it compulsorily after 3 years, you can continue with your investments beyond 3 years as well. But you can’t withdraw it before 3 years.
4. Tax implications – It is same for both PPF and ELSS. They are not taxed for the gains accumulated in them and both come under Section 80(C) i.e. investments in them  - along with other 80(C) avenues - is deductible (up to 1.5 lakhs) from income to calculate taxable income.
5. Minimum ticket size – Its same in both. One can start investing in ELSS or PPF with 500 rupees only.
6. Ease of operating – Nowadays one can open and operate PPF account linked to his bank saving account, as some banks offer PPF account as well. But in absence of the same, operating PPF becomes cumbersome as it is offered by post office and one has to brave all the “customer friendliness” of post office staff to even deposit money in that. In case of ELSS, they can be easily operated online by online credentials provided by respective Fund House. Even otherwise, if you invest through a middleman, he takes care of all your transactions and other requirements.

Though I have compared ELSS with PPF only, comparison remains almost same with other 80(C) avenues like National Saving Certificate (NSC), Tax Saving Fixed Deposits (FDs) , as these avenues are similar to PPF on above set of parameters.

To summarise, PPF and ELSS have their own respective set of pros and cons. One has to decide which set of pros and cons attract him or her. But as any balanced portfolio, your 80(C) investments should also have exposure to ELSS and should not be totally skewed towards traditional tools like PPF or NSC or FDs.

*Risk is central force to be considered while investing. more about it here and here

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