Benefits of equity-linked savings schemes go beyond saving taxes: Build retirement corpus with ELSS

The lock-in enables fund managers to deploy capital into higher conviction ideas that may take longer to deliver performance.

The rolling returns of equity-linked savings schemes (ELSS) of the last 10 years show that out of 39 schemes, 25 have completed 10 years and have delivered double-digit returns, according to data collated by Fisdom Research.

Thus, for retail investors, ELSS funds have turned out to be more than just tax-saving instruments. A valuable tool in building a sizeable retirement corpus, these funds are now an essential part of long-term investment planning. And with large-cap stocks expected to perform well now, investing in ELSS can be an attractive proposition for the long run.

For instance, considering actual returns for illustrative purpose, if an investor had opted for Quant ELSS Tax Saver Fund — the top-performing fund over a 10-year period in terms of XIRR with an annual return of 24% — the final corpus after 10 years would have soared to Rs 49 lakh. This is 3.5x of the actual investments of Rs 1.5 lakh every year. Even if he had invested in the least-performing fund which delivered a 10.5% return, the investor would have accumulated Rs 24.5 lakh for the same period, according to an analysis by Fisdom Research.

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Long-term capital appreciation

While several options are available for retirement planning, investing in ELSS can be a wise choice, especially if started early in life. By investing regularly in these funds for a couple of decades, investors can save on taxes and build a substantial corpus for their post-retirement years.

Nirav Karkera, head, Research, Fisdom, says unfortunately, many individuals overlook ELSS’s potential for long-term retirement planning and instead rely on risk-free investments such as fixed deposits, PPF, and traditional insurance policies, which offer relatively lower returns. “While these could form a part of the portfolio, relying on these alone when retirement is really far from now, may not be the best approach.”

Individuals who have opted for the old tax regime can get tax exemption of up to Rs 46,800 under Section 80C by investing Rs 1.5 lakh in ELSS. The investments in ELSS are locked for three years as compared with five years for unit-linked insurance plan, five-year fixed deposits and 15-year Public Provident Fund.

Lowest lock-in period

The lock-in enables fund managers to deploy capital into higher conviction ideas that may take longer to deliver performance. This is expected to eventually translate into relatively superior retirement corpus for investors. Profits over Rs 1 lakh a year from ELSS on redemption are taxed at 10% if held for more than one year.

Soumya Sarkar, co-founder, Wealth Redefine, says the lock-in period ensures that the fund manager adopts an aggressive investment approach, similar to a diversified equity fund. As post the lock-in period, there are no impediments to redemption, ELSS funds function effectively as diversified equity funds with added tax benefits. “In essence, viewing ELSS funds solely as tax-saving tools overlooks their potential as robust vehicles for retirement and long-term financial objectives. Investors benefit from a disciplined, growth-oriented strategy, making ELSS funds a prudent choice beyond mere tax planning,” he says.

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SIP or lumpsum

Investors have two choices for investing: SIP or through a lump sum. An SIP is an ideal option for investors who don’t have immediate liquidity available and want to avoid the last-minute rush in March by enabling them to invest a fixed amount every month. It is also a good option when the market is volatile.

Gurmeet Singh Chawla, director, Master Capital Services, says considering the relatively short lock-in period compared to other tax-saving options, medium- to long-term investors may find ELSS investments suitable, especially since equity investments typically yield higher returns over extended periods. “While a long-term horizon, ideally 5-7 years or more, is generally recommended for better returns, determining the appropriate holding duration ultimately depends on your specific financial goals and risk tolerance,” he says.