When it comes to investments made for the purpose of tax savings under Section 80C of Income Tax Act, Public Provident Fund (PPF), Life Insurance premiums and Equity Linked Savings Schemes (ELSS) are among the most popular choices, especially for young investors. However, as far as wealth creation is concerned, there is simply no comparison between ELSS and the rest of the 80C investment options. It is often seen that, when we compare different investments we are influenced by personal opinions, either our own or that of others. However, objective comparison should always be based on actual data. In this blog we will see how much wealth could have been created in the last 15 years by investing in ELSS. Why have we chosen a time horizon of 15 years? The term of one of the most popular tax saving investments, PPF, is 15 years. Hence it is appropriate to choose duration of 15 years when comparing ELSS with PPF. For our analysis we have assumed an annual investment of Rs. 70,000 in FY 2000 – 2001, Rs. 100,000 from FY 2001 – 2002 to FY 2013 – 2014 and Rs. 150,000 in FY 2014 – 2015, as per Section 80C limits for the respective years.
What would your maturity amount be if you invested in PPF
Before we deep dive into the analysis, it suffices to say that PPF is one of the best fixed income investment choices under Section 80C. The tax treatment of PPF makes the returns more attractive relative to other fixed income investments under Section 80C (like NSC, PO time deposits, tax saving fixed deposits). Even when compared to historical returns of traditional life insurance policies, PPF returns are higher. The total deposit made by the investor is Rs. 15,20,000 (Rs. 15.2 lacs) over the duration of the PPF. The maturity amount of the investor is about Rs. 29,82,000 (around Rs. 29.8 lacs).
What would your maturity amount be if you invested in ELSS
For the ELSS investment we have chosen at random a tax saver fund which has completed more than 15 years. For purpose of this analysis, we have selected HDFC Tax Saver Fund (Growth Option). Like in the previous example, let us now see how much corpus one would have accumulated in the last 15 years by investing upto the maximum 80C investment limit in the ELSS fund. The total investment made by the investor from 2000 – 2015, is Rs. 15,20,000 (Rs. 15.2 lacs), the same amount deposited in PPF in the previous example. The value of the ELSS investment as on Apr 2, 2015 is over Rs. 1.15 crores, nearly four times the PPF maturity amount.
Fund selection plays an important role in getting better investment returns
As discussed earlier, we chose HDFC Tax Saver fund at random from ELSS funds which completed 15 years. However, the HDFC Tax Saver fund has been underperforming relative to its peers for the past few years. The ELSS investor could have got even better returns than in the above example, by monitoring his investment portfolio from time to time and shifting to better performing funds. For example, if in 2010, the investor switched to Franklin India Taxshield fund, which was one of the better performing ELSS funds back then and even now, and continued to make 80C investments in the Franklin India Taxshield fund, the accumulated investment value of the investor would be over Rs. 1.3 crores. This means through portfolio reviews and better fund selection, the investor could have got 13% higher returns over 5 years. There can be a number of other possibilities through which the investor could have got better returns. We have just shown an example of why it is important that, investors should do review their portfolio from time to time and make appropriate adjustments to get better returns. Investors should seek the advice of their financial advisors from time to time, to make necessary adjustments to their portfolio, as and when required.
In this blog we have discussed why ELSS is simply the best tax saving investment option for young investors under Section 80C. No other tax saving investment has the wealth creation potential of ELSS. ELSS should generally form a major part of the tax saving investments of a young investor.
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