Is investing in ELSS best option for long term horizon?

Juzer Gabajiwala
Ventura Securities

We always see a surge in investments related to tax-saving during the end of the financial year. In fact the last quarter of the financial year ie Jan-Mar witnesses nearly 50% of the investment and the balance 50% is in the remaining 9 months. We believe that it is best to undertake tax planning in the beginning of the year and not wait till the very end. Investors should stagger their investments from the start of the financial year itself; specifically when it comes to Equity Linked Saving Scheme (ELSS) ie. follow SIP route.

Over the years, many individuals have started investing in ELSS under Section 80C. This is because along with the tax deduction, the investor also enjoys the potential upside of investing in the equity markets. But wherever there is a potential for an upside, there is also the possibility of a downside.

However, quite often ELSS is not looked at as an investment product that should be held for the long run, beyond the 3 years lock-in period which enables a tax break. Investors tend to withdraw their funds after getting the tax break. Although, ELSS is a great way to save taxes, staying invested in equity for just 3 years does not usually deliver the best possible returns. Time and again, studies have shown that to get the best benefits from equity, the longer the investment term, the better the returns and the lower is the possibility of negative returns. Hence it is ideal to look at this product for at least 10-15 years.

To draw an analogy (please note it is not a comparison): We are comfortable putting money in PPF for a fixed return (which has a 7 year lock-in and tenure of 15 years). We also purchase insurance policies, wherein we pay yearly premium and our money is locked-in for the term of the policy ranging from 10-20 years.

So then why not look at equity as a part of your long term corpus? This asset class has proven to be the best performer over the long term. The icing on the cake is that no tax is levied on the long term capital gains from equity funds and dividends are tax free too.

Given below are the returns of the ELSS category over different time horizons:

ELSS Category	1 Yr	3 Yrs	5 Yrs	10 Yrs	15 Yrs
Average Returns	35.02	16.22	11.02	12.91	12.91
Best Performer	62.74	25.06	15.81	17.88	27.18
Worst Performer	25.04	4.94	(0.44)	2.04	10.88
CNX Nifty	26.37	14.38	9.60	12.59	16.12

Source: Accord Fintech %CAGR Returns as on 17-Apr-2014. Investments assumed as a SIP for the period.

Ideally, you should choose a fund for investment purposes based on different investment time frames and fund corpuses. In many cases investors tend to exit an ELSS investment once the lock in period is complete because they suffer notional losses due to market fluctuation or due to poor selection of funds. While the three year milestone can be used to review the performance of an ELSS investment, it should not be used as an automatic exit point.

Holding ELSS for a period of 10-15 years, as the data clearly shows, is better than stepping out at the end of 3 years. It is not only more fruitful for investors in terms of returns but it reduces the probability of facing negative returns as well. A minimum of 10-15 years is an ideal horizon for any ELSS investments, mainly because it gives the fund manager the room to take a long term view on the market and invest accordingly, as is clearly reflected from the long term returns.

My question to all investors is - If we are comfortable with PPF and Insurance products for 10-15 years why not ELSS?

Below table shows the performance of existing tax-saving funds across different time periods.

Scheme Name	AUM (in Crs)	1 Yr	3 Yrs	5 Yrs	10 Yrs	15 Yrs
ICICI Pru Tax Plan	1,704.59	31.59	10.04	24.59	20.95	-
Quantum Tax Saving Fund	18.87	23.44	9.51	22.54	-	-
HDFC Long Term Adv Fund	925.81	27.30	8.81	21.97	18.47	-
Canara Rob Equity Tax Saver Fund	668.96	19.66	8.36	21.90	-	-
Reliance Tax Saver (ELSS) Fund	2,208.33	31.05	10.41	21.60	-	-
Religare Invesco Tax Plan	152.89	24.79	9.44	21.50	-	-
HDFC TaxSaver	3,710.86	27.48	6.50	21.04	20.86	19.90
Franklin India Taxshield	1,086.65	23.27	9.13	20.63	17.66	25.05
DSPBR Tax Saver Fund	757.94	23.19	7.91	19.91	-	-
Sahara Tax Gain Fund	10.51	29.88	7.58	19.82	17.94	18.63
L&T Tax Advt Fund	1,209.71	22.03	5.91	19.74	-	-
HSBC Tax Saver Equity Fund	180.73	24.67	9.80	19.23	-	-
BNP Paribas Tax Adv Fund	184.18	23.88	11.58	18.99	-	-
IDFC Tax Advt(ELSS) Fund	185.51	25.12	8.79	18.70	-	-
ING Tax Savings Fund	22.55	16.55	3.40	18.37	12.36	-
Birla SL Tax Relief '96	1,470.76	25.39	6.50	18.27	-	-
BOI AXA Tax Adv Fund	33.53	24.18	6.20	17.92	-	-
SBI Magnum TaxGain'93	4,163.09	24.42	8.74	17.72	-	-
Birla SL Tax Plan	128.89	24.54	7.69	16.85	-	-
JPMorgan India Tax Advantage Fund	5.60	19.92	5.22	16.79	-	-
Taurus Tax Shield Fund	88.31	14.92	3.90	16.73	14.15	-
Edelweiss ELSS Fund	29.73	23.32	8.78	16.29	-	-
L&T Tax Saver Fund	27.74	28.28	3.84	16.21	-	-
UTI ETSP Fund	436.97	18.54	5.48	15.73	-	-
Sundaram Tax Saver	1,139.10	15.87	5.78	15.30	-	-
Kotak Tax Saver Scheme	353.17	10.91	2.56	14.98	-	-
DWS Tax Saving Fund	41.86	20.84	5.17	13.72	-	-
LIC Nomura MF Tax Plan	30.36	20.44	4.02	12.83	7.88	8.38
JM Tax Gain Fund	29.98	22.18	3.90	11.40	-	-
Escorts Tax	2.46	19.34	-6.09	6.87	6.36	-
Axis LT Equity Fund	1,172.72	34.76	15.09	-	-	-
Union KBC Tax Saver Fund	62.04	19.20	-	-	-	-
S&P BSE SENSEX		20.81	5.27	15.46	14.45	13.62
CNX Nifty Index		19.17	5.18	14.90	13.75	13.85

Source:Accord Fintech, %CAGR Returns as on 17-Apr-2014. AUM figures for the month of March 2014. Returns are sorted on 5 year basis. All growth schemes have been considered.

Hence, equity can be a risky investment if you're investing for a short period of time, but with time on your side, equity is extremely rewarding.

As per AMFI's data, it has been seen that for the financial year 2013-14, in April 2013 only 6% of collection was done, whereas in the month of March 2014, 28% of sales took place for the ELSS category. Thus, we can say that most of them start their tax-saving at the end of the financial year instead at the start of the financial year.

It is beneficial that one should start their tax-saving at the start of the financial year and invest in ELSS category with a long term horizon.