Tax saving through Equity Linked Savings Schemes (ELSS) & Public Provident Fund (PPF)
In a recent article of our Tax Season series, called How to choose the right tax saving investment for you? we mentioned that ELSS has outperformed PPF by a very, very wide margin over a 15-year period, which is the lock-in period for the traditional tax saving product.
Many of our readers wrote in, asking us for more details on this sweeping statement, so we decided to share our comparative research on these two 80C investment contenders with all our readers.
But before we get down to the results of the number-crunching, we’d like to present a quick overview of these two products as we are effectively comparing apples and oranges from the world of investment.
Both these ‘fruits’ have different flavours and textures and health benefits for a portfolio. So, while those with a lower appetite for risk may be quite understandably drawn to PPF, those with less patience to watch their capital locked in for a period of 15 years may prefer ELSS.
Our recommendation would be: consider your overall portfolio of investments and goals and undertake your tax saving investments based on these criteria. Inflation is also a very relevant consideration while investing in any instrument. Due to inflation, the goods and services that you purchase today will cost more in the future. So, if you are saving for your long-term goals, for example retirement, then the returns on your investments must beat inflation by a decent margin.
Facets of PPF and ELSS
1. Public Provident Fund (PPF):
PPF is one of the most popular fund-raising mechanisms by the Government. The interest rate, effective for January 2020,is 7.9%p.a.For someone in the highest tax slab, paying 31.2% tax, the effective yield is nearly 11.5% p.a. Hence, this instrument is extremely good for investors who want to save tax and also want to invest in safe instruments. In fact, PPF has a corpus of nearly Rs. 16.6 lacs crores. One needs to ensure that atleast a part of one’sinvestment corpus is in PPF. An instrument better than PPF, specifically for those in employment, would be to opt for EPF as a voluntary contribution, as the rate of interest is higher @ 8.65% p.a.
2. Equity Linked Savings Schemes (ELSS):
ELSS is a type of mutual fund scheme where the majority of the investment goes into the equity market. This type of investment helps an investor to not only save tax but also generate wealth. One can also plan to create a retirement corpus through ELSS. Therefore, in addition to providing tax benefits, it also generates higher returns.
Comparison between ELSS and PPF:
The chart below clearly plots the growth of investment in ELSS, PPF and Nifty 50.
It shows that if someone had started investing Rs. 1.5 lacs each year from January 2005 and continued investing for 15 years, the total investment would be Rs. 22.50 lacs at the end of December 2019. The returns which one could have earned by investing in PPF are Rs.41.1 Lacs (assumed ROI of 8%). And the same amount, if invested in the worst performing ELSS Fund, would have given 17% more returns than PPF while the best ELSS fund would have given 77% higher returns.
But one needs to realise that the higher returns of ELSS come with higher volatility in the short term. So, one should be prepared to invest for longer horizons when choosing ELSS. Along with this, the above chart also shows the movement of NIFTY50, which reveals that it would have also beaten the returns of PPF over a period of around 15 years.
A wholesome investment diet…
An important point to consider is that if one can stay invested in PPF for 15 years, then why not consider investing in ELSS for a duration that is at least as long? If, as an investor, you have not invested in equity, then along with the PPF you should allocate a certain amount to ELSS as well. This is because, over the long term, equity has always outperformed all the other asset classes available for investment. Investors who want to invest Rs. 1.5 lacs in tax saving instruments should consider both ELSS and PPF so that they can enjoy the safety of PPF and the better returns from ELSS scheme as well. By investing in ELSS we can avail the dual benefit of tax saving and wealth creation.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.