Those who save taxes using ELSS funds do it for mostly three years
But if you stay invested in ELSS for 10 to 20 years, the advantages are huge
Yes, you have read it right. ELSS, which is often touted as the best tax saving option, is also the best option to create wealth over the long term. The explanation is simple but before delving deeper into the topic it is important to understand one great thing about ELSS fund, apart from being a tax saving option, which is directly linked to this discussion.
ELSS funds are typically flexi-cap funds. That means they invest in companies of all sizes and across sectors and therefore have a diversified portfolio. Also, it gives the flexibility to change the portfolio composition as per the market conditions and hence they are better equipped to take advantage of emerging opportunities. This feature makes it a great investment option apart from being a tax-saving tool.
But why exactly are we calling ELSS the best mutual fund option to create wealth?
Most people don’t plan for tax saving and lose the benefit under section 80C. And, thus they can't save ₹1.5 lakh to get ₹46,000 taxes every year, said President of DSP Investment Managers Kalpen Parekh.
Then for those who save tax using tax saver funds do it for only three years just because these funds have a lock-in period of three years and you can exit after that, he added.
But ideally, if you stay invested for 10/20 years, the invested money can compound at equity returns and create significant wealth, Kalpen also said.
Let's crunch in some numbers to understand it better.
Let's suppose, you are in the highest income tax bracket of 30%, and can save up to ₹46,800 by utilising Sec 80C, including 4% cess in income tax. Then, you can again invest that ₹46,000 saved (less tax ) annually in a flexi cap fund and earn long term compounding on that too.
Suppose a flexi-cap fund provides a 10% return on an average (though MFs do not promise any guaranteed returns). And investing ₹1.5 lakh in the fund for 10 years, you can create a corpus of ₹25.8L. (10 year time period)
Now, if that flexi-cap fund is ELSS fund, you can save ₹46,800 yearly as taxes. Now if that money is again re-invested in the same fund, you can create an additional corpus of ₹8 lakh.
So, by investing in ELSS fund you can create a corpus of ₹33 lakh against the corpus of ₹25 lakh for investing in regular flexi-cap fund.
Tax Saving ELSS fund can help you save more
Investment per year
Average rate of return (assumption)
₹1.5 Lakh + ₹46,800
Now in 20 years, by investing the same amount for 20 years you can create a corpus of ₹1.3 crore.
Staying invested in ELSS for 20 years
Average rate of investment (assumption)
₹1.5 lakh + ₹46,800
Don’t save tax alone, compound the money too, concludes Kalpen.