ELSS Mutual Funds: Losing Their Charm or Still a Viable Option?

The debate over whether ELSS mutual funds are losing their charm has been a topic of discussion among financial advisors and investors alike. With the introduction of the new tax slab structure in the Budget 2020-21, coupled with the availability of more investment options, the narrative around ELSS has shifted. However, is ELSS still a viable tax-saving instrument?

The New Tax Slab Structure

The budget introduced new optional tax slabs for individuals who forgo exemptions. These new slabs are designed to provide a more nuanced approach to tax planning:

Up to Rs.5 lakh Nil Rs.5 lakh to 7.5 lakh 10% Rs.7.5 lakh to 10 lakh 15% Rs.10 lakh to 12.5 lakh 20% Rs.12.5 lakh to 15 lakh 25% Rs.15 lakh and above 30%

With these changes, there is no longer a need to block money or avoid investing to save taxes. Additionally, there are numerous other options available to achieve 80c tax rebates, such as Public Provident Fund (PPF), National Pension Scheme (NPS), Insurance, and Housing Loans.

Performance Over the Last Few Years

The returns from ELSS mutual funds in the last three to four years have been less impressive. Critics argue that these funds have not delivered the expected returns, leading many investors to question their long-term value as a tax-saving tool.

Rebuttal: ELSS as a Viable Tax-Saving Instrument

Notwithstanding the performance concerns, many experts still believe that ELSS mutual funds are one of the best forms of tax-saving instruments following PPF and NPS. Here are some arguments in favor of ELSS:

Reasons for Considering ELSS

High Growth Potential: ELSS funds are equity-oriented and offer the potential for higher returns over the long term compared to other tax-saving instruments. Professional Management: These funds are managed by professional fund managers, which can lead to better performance. Liquidity: While ELSS typically has a lock-in period of three years, it offers more liquidity compared to long-term investments like PPF and insurance policies.

Alternative Investment Options

It is important to note that while ELSS is still a strong choice, other options like PPF and NPS have their own merits:

PPF: Offers a fixed interest rate and is backed by the government, making it a safer choice. NPS: Unit-linked insurance plans (ULIPs) provide a combination of savings and life cover, with the potential for tax benefits. Housing Loans: While not directly contributing to the tax rebate, a housing loan can still be an attractive investment option for those looking to build assets.

Conclusion

In conclusion, while ELSS mutual funds may have faced some challenges in the recent past, they still remain a valuable tax-saving tool. Investors should consider their financial goals, risk tolerance, and long-term investment strategies when deciding on the best course of action. ELSS will not lose its charm as long as investors understand the benefits and limitations of this investment option.