Equity linked savings are volatile, but fetch higher returns than PPF

BHUBANESWAR: Nick is an equity analyst in his late forties, who earns well and can afford a high standard of living. He holds some equity shares and fixed deposits with banks. He has some savings, but would now like to build a bankable retirement corpus.

Moreover, it also time for him to make his annual tax savings. His friend advised him to consider Public Provident Fund (PPF). His colleague, on the other hand, suggested Equity Linked Savings Scheme (ELSS), as he also has to look at creating wealth. Nick, however, is confused, as ELSS is not a retirement product.

If you are a risk-seeking investor who likes compounded growth with volatility in investments, ELSS is the most preferred investment avenue to save tax and at the same time offer a lower lock-in period of three years. However, it is this volatility that does not find preference with most risk-averse investors.

PPF was introduced by the government to encourage people to save and make provisions for old age. It’s quite famous for its safety and assured returns. On the other hand, ELSS is fairly a new financial product (from last 15 years). It ensures that your equity mutual funds deliver higher returns, but at the same time, they are volatile and their returns keep fluctuating based on market conditions.

When it comes to returns, ELSS schemes generate a corpus higher than PPF. Then, over a 15-year period, the absolute returns generated is more than three times the returns generated by the PPF. From the last few years, PPF returns is hovering around 8 per cent, while ELSS returns are not fixed in short term. In the long term, a return in the range of 12-18 per cent can be assured.

However, in many cases, the imposition of 10 per cent tax on dividend distributed by equity mutual funds, including ELSS funds, is worrying investors. Experts say investors should not shun ELSS. The varied nature of these investing avenues has a different role to play in one’s portfolio. For aggressive investors, ELSS is lucrative as it has the potential to offer superior returns than other investments permitted under Section 80C since ELSS invest mostly in stocks, irrespective of the new tax. Being a sole equity-based instrument, ELSS funds are an ideal long-term investment. The higher rate of return, the greater the benefit of compounding, which will accelerate corpus growth.