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Why should millennials consider ELSS as a tax-saving investment?
India has one of the youngest populations in the world. The median age of the world's fastest-growing economy stands at 27 years, creating a demand for fast new-age products, including ways to invest.
Millennials, a popular media term used to address those born between the 1980s and the early 2000s, are very far from their retirement years. Driven by traditional family values and ambitious life goals, Indian millennials are motivated to earn more and invest their savings. They are serious about taking control of their life decisions, spending quality time with friends and family and building assets.
This tech-savvy crowd has easy access to information to remain aware of the abundance of options they have to make their disposable income work for them.
Multiple surveys show that unlike their parents, the young population has been choosing equity over real estate or gold. A large majority choose to invest via mutual funds, primarily through Systemic Investment Plans (SIPs). In fact, many choose to start saving via SIPs than bank recurring deposit schemes.
Mutual funds come with a wide range of options in terms of fund management companies as well as schemes that investors can choose over a regular bank deposit to make monthly contributions towards savings.
Among these, Equity Linked Savings Schemes (ELSS) have become the go-to investment vehicle for millennials, especially for younger investors who do not have commitments like home loan or child's education.
What makes ELSS attractive to young investors?
ELSS which is a tax saving mutual fund, gives investors the convenience of starting with as little as Rs 500. Almost all fund houses in India offer these schemes which are actively managed by experienced professionals to fetch high returns.
Millennials across ages have the option to choose between investing in lump sum as well as in the form of SIPs, based on their preference.
Further, ELSS is the only class of mutual funds eligible for tax deduction under section 80C of the Income Tax Act. In fact, a maximum of Rs 46,800 per year can be saved on taxes (calculation is based on the highest tax slab) through these.
With a minimum lock-in period of 3 years, it is the investment product with the shortest maturity period among all other tax-saving products under section 80C like Public Provident Fund (15 years), ULIP (Unit Linked Investment Plan) and the 5-year tax-saving fixed deposit.
Young investors can unfold the true potential of this multi-cap fund by staying invested in them for more than 3 years as equity is known to fetch higher returns in the long term. Even if ELSS were to be taxed, their post-tax returns have proven to be higher than other section 80C investments with tenures of over 5 years.
Data suggests that ELSS generates over 12 percent returns when stayed invested for over ten years, thus, proving considerably profitable when compared to 8 percent offered on PPF.
For example, the Franklin India Taxshield, an ELSS fund managed by Franklin Templeton Asset Management (India), has fetched an annualized return of 10.37 percent for its 3-year scheme, 12.54 percent for 10-years and 21.61 percent since inception (based on NAV as on 27 December 2019).
Additionally, ELSS offers flexibility not seen in other tax-saving investments. As mutual funds can be tracked for their performance, you can move to another fund at any time if you are not satisfied by the returns generated by your fund manager, as there is no commitment to a multi-year deal.
The three-year lock-in period also inculcates a sense of financial discipline among millennials to save for the future.
For those who are not well aware of direct equity investments or do not wish to risk their savings, ELSS offers a shield to the market volatility as the scheme is not only long-term but managed by experts in the field.