Tax-Saving Options: How Much Should You Invest In ELSS?

By Joydeep Sen 

Come March, and it is about tax saving investments. One of these tax savers is Equity Linked Savings Scheme (ELSS). While there is no limit as such for investment in ELSS funds, from the tax savings perspective, under Section 80C, there is a limit of Rs 1.5 lakh per year. In a hurry to execute the tax-saving investments, people invest an amount upto Rs 1.5 lakh in ELSS funds, to avail of tax benefit and equity upside, but it will be even better to dovetail the ELSS component in your overall financial plan.

Investments for goals
Investments should be for goals in life and investment in various avenues should be as per the allocation plan. Let us take a few portfolio of different sizes. For a large portfolio, with incremental investment of, say, Rs 30 lakh per year, the incremental investment in ELSS would be Rs 1.5 lakh as per tax saving objective, which is only 5%. For the balance investment in equity, there is no harm in investing a higher quantum in ELSS. However, in other categories of funds, you can take a more nuanced call on whether you want large cap or small cap or multi cap.

For a mid-size portfolio with incremental amount of Rs 5 lakh per year, if you are lodging Rs 1.5 lakh per year in ELSS funds, this itself forms 30% of the investments for the year. If the equity-debt ratio is say 60:40, then another Rs 1.5 lakh has to be allocated to other equity funds. For a portfolio that adds Rs 2 lakh per year, the equity-debt allocation needs to be taken care of. If the decided allocation is say 60:40, then Rs 1.5 lakh in ELSS would skew the ratio. In that case, as much amount, i.e., Rs 1.2 lakh can be invested in ELSS and the balance in other fixed-income-oriented tax saving avenue.

Basis for selecting ELSS funds
The basis for selection of funds in ELSS category is same as in other categories, which are (a) basic hygiene factors for selecting the AMC (b) track record / performance and (c) corpus size, vintage, etc. The mode of investment in ELSS should preferably be through a systematic investment plan (SIP). If the benefit of cost averaging is availed of in other investments in a planned manner, why not in ELSS?

The horizon for investment in ELSS can be adequately long. If the horizon is 10 years for other equity funds, it can be 10 years in ELSS as well. The 3-year lock-in stipulated for ELSS funds is a tax-saving requirement, but it can be held as long as you want. To reap the benefit of long-term equity investment, from the growth of the economy, keep the fund for long term, provided you have incremental savings every year to execute tax saving investments.

To compare ELSS funds with other equity fund categories, apart from the tax savings aspect, in ELSS the law does not define the underlying portfolio—whether it is large cap or small cap. SEBI rules state that 80% of the portfolio of ELSS funds should be in equity. Hence, effectively it becomes a multi-cap fund, where the fund manager can have a long-term view on investments as redemptions will not happen before three years of holding for a particular investor.

The ELSS component should be viewed along with the overall equity allocation. If the SIP in ELSS is a relatively small component, plan out the other categories. For a retail portfolio, cap the ELSS within the overall equity allocation. There is no harm in keeping the entire equity allocation in ELSS, for a retail portfolio, to have the added benefit of tax savings. In such a case, preferably invest for a horizon much longer than three years. For a larger portfolio, ELSS can be any percentage of the equity allocation, as per suitability.


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