ELSS Investing - Check Risk Profile

Everyone, it seems, is in love with tax-saving mutual fund schemes or ELSS (equity linked savings schemes) these days. Mutual fund advisors are recommending them to investors who are looking to hike their investments under Section 80C to save taxes.

Investors also seem to believe in the sales pitch of "superior returns" within three years. Section 80C of the Income Tax Act allows tax exemption of up to ` . 1.5 lakh on investments in some specified investments, and the limit was increased from ` . 1 lakh . 1.5 lakh in the last Budget. Salaried tax payers go for insurance cover, five-year bank fixed deposits (FDs), public provident fund (PPF), ELSS, among others.

Most investors have become positive about the stock market and they readily accept our recommendation. They know the market has given phenomenal returns in the last year, and feel that it is likely to give superior returns in the next few years because of the new central government. Tax-saving scheme category has offered around 60% returns in the last year. Many advisors are heavily banking on the buoyant stock market to peddle these schemes and are dismissive about other conservative options like a five year FD and PPF. I always used to advocate investing in ELSS, but many investors used to prefer investing in insurance policies. But now the market has picked up and more people are ready to invest in ELSS.

Though all these sales pitches have some truth, they are not entirely believable. For example, consider the lock-in period. ELSS has the lowest lock-in of three years among the other common choices in the Section 80C basket. Tax-saving FD comes with a five-year lock-in, whereas PPF is a 15-year account which allows partial withdrawals under certain circumstances after six years.

However, ELSS does not guarantee any returns, whereas bank FD and PPF come with assured returns. Also, returns from ELSS depend on the market's performance. And, as the disclaimer goes, its spectacular performance in the last year does not guarantee a repeat in the coming years. For example, the category offered 60% in the last year, but it has offered only 14% in the five-year period. It is true that people get swayed by the performance of schemes in the immediate past. But as things stands today , the prospects of this category looks. Even if you look at the long returns, 15% tax-free return after three or five years is not that small.