Nirav Panchmatia's Blog

CRISIL report confirms my view on Tax saving Mutual Funds

Great!!! I now have the backing of India’s leading credit rating agency CRISIL confirming my view that Tax Saving Mutual Funds, also known as ELSS, are an Investors best bet as far as Tax Saving Investments are concerned. The investors favourite, PPF NSC, have been beaten black & blue by good ELSS funds over a 10 year period, as per a recent report published by CRISIL.

So all those articles that I have written on Tax Saving Mutual Funds or ELSS have not gone in vain.

Here is the list of my previous articles on Tax Saving Mutual Funds; in fact, my latest article titled “Invest and therefore save tax and not vice versa”was published by me a few weeks back on this BLOG and sums up and provides links to my previous articles on Sec 80C and tax saving investment options…

Some of my articles on ELSS or Tax Saving Mutual Funds:

No. Article Heading
1 Invest and therefore save tax and not vice versa
2 Death and Taxes
3 4 Strong Reasons to Invest in Tax Saving Mutual Funds
4 Tax Saving Mutual Funds: Grab them with both hands

CRISIL, India’s leading credit rating agency, carried a detailed analysis of various tax saving options available based on past 10 years performance & it confirms that ELSS or Tax Saving Mutual Funds are better that most other tax saving avenues like PPF or NSC over a 3 year and more important a 10 year investment horizon….

Here are the links to CRISIL’s report in India’s leading business dailies:

Business Daily Article Link
The Economic Times ELSS better investment option than PPF, NSC: Crisil
Business Standard ELSS better investment option than PPF, NSC: Crisil
The Financial Express ELSS better than PPF, NSC: Crisil
Indian Express ELSS trumps PPF on returns
Moneycontrol.com ELSS better investment option than PPF, NSC: Crisil

Snippets from some of the above articles worth reading and pondering on:

Indian Express put it very nicely:

A penny saved is a penny earned. In the long run, those who follow this simple yet very powerful principle would probably be more financially sound than those who don’t. And those who go one step further by not just “saving” but “investing” in appropriate asset classes and products would likely benefit all the more.

Equity Linked Savings Schemes (commonly known as ELSS schemes or Tax Saving Mutual Funds) offered by mutual funds combine these two principles to create a product that not only help investors to save tax but also has the potential to help build wealth in the long run. However, ELSS funds differ from most of the other tax saving investment instruments in terms of their risk-return characteristics and for that reason, many investors tend to prefer traditional tax saving investments over ELSS funds.

Like most equity funds, ELSS funds also tend to be volatile in the short term but have the potential to help investor generate wealth in the long run. Their wealth generation potential along with the compulsory minimum investment period of at least three years makes it a great investment option for investors looking to benefit from tax deductions under Section 80C.

As per a study carried out by Fidelity Worldwide on Indian Tax Saving Mutual Funds, Rs. 1 lakh invested in ELSS funds on an average would have grown to Rs. 3,23,036 in a five-year time-frame whereas the same amount invested in PPF or NSC would have grown to just Rs 1,49,120 and Rs 1,50,317 respectively. It was also interesting to learn that more than three times out of five, ELSS funds outperformed PPF by over 10 per cent on an annualised basis.

Economic Times quoted CRISIL and said:

The PPF accounts fetched 8.12 percent over the last 10 years and in the similar period, the NSC gave an interest of 9.10 percent. The average inflation over the past 10 years stood at 6.05 percent.

As per CRISIL analysis, Tax Saving Mutual Funds or ELSS gave 26 percent and 22 percent annualised returns over three and 10 years respectively vis-a-vis 8 to 9 percent offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC).

ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7 percent over the past three years, top ranked ELSS gave an inflation adjusted return of 14 percent, which is significantly higher than returns offered by other tax saving products.

Crisil, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times.

Business Standard says:
Though the traditional debt products like PPF & NSC are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns in the long run.
The PPF accounts fetched 8.12% over the last 10 years and in the similar period, the NSC gave an interest of 9.10%. However, the average inflation over the past 10 years stood at 6.05%. So post-inflation returns of PPF & NSC are not at all attractive which is not the case with ELSS.
To sum up:
So, based on the CRISIL Report and what various leading business dailies in the country have quoted, if one has to put it in a tabular format:
ELSS Returns v/s PPF NSC post inflation.


Tax Saving Investment option u/s 80C

10 year Annualised returns as per CRISIL report

Average Inflation rate assumed

Post Inflation rate per annum
Top ranked Tax saving Mutual Funds or ELSS* 22% per annum 7.0% per annum 14% to 15% per annum
PPF 8.12% per annum 7.0% per annum 1.12% per annum
Employees Provident Fund (EPF) 8.25% per annum* 7.0% per annum 1.25% per annum
NSC 9.12% per annum 7.0% per annum 2.12% per annum

*going forward; Source: Crisil Report

A few words of caution here:

As of today, there are more than 35 ELSS or Tax Saving Mutual Funds in existence today. If you have to invest Rs. 1 lac under section 80C in ELSS funds, you should invest in 1 or 2 ELSS funds.

Which ELSS funds will you chose? My advise is that an Investor should either himself do a thorough research while choosing a good ELSS fund or take help of a Financial Planner or a  Mutual Fund Expert / Advisor (not the typical commn agent; hope you know the difference by now).

Even though Tax Saving Mutual Funds require you to stay invested for 3 years, for the sake of safety, keep a 5 years investment horizon

Go for dividend payout option rather than a growth option for your ELSS funds…

Keep visiting this BLOG for further inputs…

HAPPY TAX INVESTING!


Print pagePDF page

Leave a Reply

Your email address will not be published. Required fields are marked *