Don't invest more than 80C limit­­ in equity-linked savings schemes

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As we enter the last quarter for making tax-saving investments, most investors would be looking for the right instruments to invest in under Section 80C. If you ask an investment advisor, he will tell you that equity-linked savings schemes (ELSS) are perhaps the best option.

ELSS schemes, or tax-saving mutual funds, provide tax benefits under Section 80C up to a maximum limit of Rs 1.5 lakh. They also provide long-term wealth creation possibilities since the money is invested in equities, which have a greater likelihood of fetching inflation-beating returns. “Being an equity-oriented scheme, ELSS has the potential to provide higher returns than other tax-saving options. The 10-year average CAGR (compounded annual growth rate) of the ELSS category of funds is approximately 16.5 per cent,” says Devang Kakkad, head of research, Equirus Wealth.

Another advantage of ELSS funds is that they have a lock-in of three years, which is lower than in other preferred tax-saving instruments, like Public Provident Fund (PPF), fixed deposits, and unit-linked insurance plans (Ulips). The lock-in in these plans starts from five years.

Most investors, however, struggle to decide how much they should invest in ELSS funds in a year. Should it be the entire Rs 150,000 allowed for tax-saving under Section 80C? Should one exceed that limit, given the attractive returns of these funds, as many investors tend to do?

Investment experts feel that exceeding the Section 80C cap might not be prudent. “Investing above the tax-exemption limit is not advisable since there is a lock-in of three years. Investors have the option to invest in other open-end mutual funds that can offer similar returns, while also providing liquidity,” says Jayesh Faria, senior executive group vice president, Motilal Oswal Private Wealth Management.

Bhavana Acharya, deputy head-mutual fund research at, agrees and says the lock-in period is a limiting clause. “The lock-in is the main drawback, as it doesn’t allow exit or switching to a better equity fund if the ELSS fund happens to underperform, or if investors had invested into one that’s unsuitable for them. Two, if investors were to use ELSS funds as they would other multi-cap funds in a goal-oriented portfolio, it could mean that a portion of the corpus can’t be liquidated when they need it for the goal,” she says. If you have already exhausted the Section 80C limit with other investments, it might not be beneficial for you to invest further in ELSS.

Investing in ELSS should be a part of your overall financial plan. ELSS will qualify as an equity exposure in your portfolio. If it is going to overexpose you to equities, then you should choose debt-oriented instruments for tax saving.

Although performance-tracking should not be the sole criterion for judging a mutual fund scheme, it does provide a guidance while investing. Hence, let us take a look at the return advantage that ELSS has provided over diversified equity funds over the past three and five years. The incremental benefits of ELSS funds over other diversified fund categories is quite negligible, if the tax exemption factor is not considered (see table).

­­Finally, even within the ELSS universe spread your investments over a few schemes. “This will help manage the risk arising from poor performance, or change of fund manager, especially during the lock-in period,” says Kakkad.

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