Which is a better investment option: ELSS or PPF?
Posted by: Girija Gadre, Arti Bhargava and Labdhi Mehta on Jan 16, 2017, 03.03 PM IST
Nayana is a young banking professional. It's the last quarter of the financial year and she is trying to figure out tax-saving options under Section 80C. Her father has suggested investing in the Public Provident Fund (PPF). However, her adviser recommends investing in Equity Linked Saving Schemes (ELSS) instead.
Her father is worried about this as he has never explored anything beyond PPF. He derives comfort from the fact that it is a fixed income oriented investment, guaranteed by the Government of India and the interest income as well withdrawals are exempt from tax. Nayana is, therefore, a little confused about which option to choose.
Nayana and her father have to understand that tax-saving investments should not be looked at from a tax saving perspective alone. We are talking about Rs. 1.5 lakh of her hard-earned money, which she has the option of investing year after year. There is no reason not link it to one of her long-term goals like saving for retirement, buying a house and the like.
Investing in a fixed income product like PPF will restrict her returns. With inflation hovering around 6%, her real rate of return is only 2-3% with PPF. Such low returns will prevent any major gains accruing over a long period of time.
ELSS actively invests in the equity markets, with a potential to earn higher returns than traditional savings options like PPF. In fact, if Nayana's father had invested in ELSS instead of PPF 15 years ago, his investments in equity would have grown to Rs. 61 lakh as against Rs. 29 lakh in PPF.
If risk is what Nayana's father is worried about, risk of loss in equity tends to reduce over the long term and tax-saving investments under Section 80C are usually for the long term. Hence, ELSS fits the bill. Moreover, ELSS will effectively be a tax-free investment (EEE) for Nayana.
The investment gives deduction up to Rs. 1.5 lakh and both dividend as well as redemption proceeds are exempt from tax. Nayana also gets better liquidity with ELSS' lowest lock-in period of 3 years, should she feel the need to redeem the investment for some reason. To top it all, she can do a monthly SIP, which means every month she invests Rs. 12,500 instead of bunching everything up at the year end.
Therefore, Nayana must refrain from allocating funds towards tax-saving options the way her father did. Instead, she should weigh the pros and cons and aim for more with ELSS, instead of getting stuck with fixed income-oriented investments like PPF.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
This article appeared in Economic Times dated Updated: Jan 16, 2017, 03.03 PM IST