Investments in an Equity-Linked Savings Scheme (ELSS) of a mutual fund have yielded higher returns compared to other instruments like PPF and NSC in the last few years, a report by Crisil has said today.
"Our analysis shows that ELSS gave 26% and 22% annualised returns over three and 10 years, respectively, vis-a-vis 8-9% offered by traditional tax saving investment products such as public provident fund [PPF] and national savings certificates [NSC]," Crisil said.
Crisil added that interest on employees provident fund (EPF) for 2011-12 was slashed to 8.25% from 9.5% in the previous year and thus ELSS can act as a strong alternative to investors.
Though the traditional debt products 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%. The average inflation over the past 10 years stood at 6.05%.
"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% over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14%, which is significantly higher than returns offered by other tax saving products," Crisil's senior director Mukesh Agarwal said.
The rating agency, 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," Crisil head for Funds and Fixed Income Research Jiju Vidyadharan said.
It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.