Most of us use Public Provident Fund (PPF) as an avenue for long term savings as well as availing tax benefits under section 80 C. The finance ministry last week rolled back a reduction in PPF & other small savings rate. However, a future reduction in interest rates cannot be ruled out.

Given the steadily declining rate on PPF & tax on interest income on annual contributions over 2.5L in case of EPF/VPS it is now time to re-evaluate this option.

ELSS can be considered as a better alternative, which gives better returns & the same Tax Benefit. ELSS have a lower lock in period (3 Years) as compared to other government savings schemes. Traditionally, they have also given better returns (in the range of 10% – 12%).

However, selecting the right fund becomes extremely important because investment in ELSS have 36 month lock in period. Please note that in case of SIPs, each SIP will have a 36 month lock in period. Also ELSS being an Equity oriented scheme is subject to market fluctuations as compared to fixed income nature of PPF/SCSS.

However, an investor needs to bear in mind that in spite of fluctuations in returns over the longer term say 5 years or 10 years, ELSS clearly beats fixed income schemes as demonstrated below.

Let’s look at historical PPF rates:

Source: www.nsiindia.gov.in

As can been seen from the chart above, PPF rates have been on a progressively downward trend since the past 10-15 years. Now let’s look at ELSS Returns. As we can see, in the long run, ELSS has given better returns in the range of 12%-14%

Source: moneycontrol # Based on data as of 31^st March 2021. ELSS Returns are linked to Equity Market Performance and are subject to fluctuations.

We need to keep 3 main things in mind while selecting the right ELSS Scheme:

Investment Pattern of the Scheme:

As per SEBI all ELSS schemes must invest at least 80% of the corpus in equity instruments. However there is no mandate on % allocation in particular equity instrument. The fund manager can decide how much of the corpus has to be invested in large, mid or small cap stocks. It therefore makes sense to evaluate asset allocation between large, mid & small caps prior to selecting the right scheme.

Risk Involved:

We all know that investment in mutual funds carry some amount of risk. Before investing in ELSS funds investors much understand the risk involved.  You should first evaluate your risk profile & then decide which scheme you want to invest in.

Past returns:

While investing in any mutual fund one must consider the rate of return delivered by the scheme in the past. Past 3, 5, 10 yr. CAGR can give you a fairly good idea about the schemes performance. However we also need to keep in mind that past performance cannot guarantee future returns.

To determine your risk profile & know more about how to invest in ELSS & other mutual fund schemes email us at info@investopert.com or Call/WhatsApp us at 9321286864