Year-end special: ELSS schemes are going to be volatile in 2017, says Sanjay Arora of Escorts MF

Demonetization has reduced interest rates and real estate prices are also likely to slump. The only choice you have is equities, says Sanjay Arora, CIO, Escorts Mutual Fund.

Equity Linked Savings Schemes (ELSS) or tax planning or saving mutual fund schemes are often the first mutual fund investment for many investors. Investments in these schemes qualify for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

ELSSs have many advantages. However, two of them - a lock-in period of three years and investments in equity - make them unique among other investments permitted under Section 80C.


ELSSs have the shortest lock-in period of three years among investments that qualify for a tax deduction under Section 80C. Other popular investments like Public Provident Fund (PPF) and National Savings Certificate (NSC) have longer lock-in period. All investments under Section 80C come with a mandatory lock-in period.

Another plus point of ELSS is that they invests in stocks. Of course, this makes them a risky investment option. However, the lock-in period of three years mostly helps investors to get used to the volatility typically associated with the stock market. The mandatory lock-in period also forces them to hold on their investments.

The equity investments give ELSS have an edge over other tax saving options available under Section 80C to create wealth over a long period. Equity is considered the best investment option to invest for long-term financial goals because it has the potential to offer superior returns than other assets over a long period.

That is why it is imperative that you should consider investing in ELSS to save taxes. The tax deduction along with superior returns would help you to create a large corpus for your long-term financial goals.

We spoke to Sanjay Arora, CIO, Escorts Mutual Funds, to find out how these schemes have fared in 2016, and also what the next year holds for them.

Escorts Tax Planning Scheme has performed spectacularly in 2016. What contributed to the performance?

The best a fund manager can do is to invest in companies with competitive advantage at reasonable valuation. The rest is on the management to deliver. It may be our good fortune that management of some companies that we chose delivered. Moreover, for some time as it was difficult to find good companies trading below their fair price, we were largely in cash.

The Tax planning category had an average year in 2016. What went wrong?

Market performance is a very large variable for equity returns. This year, despite the market volatility, index returns are flat.

Do you think ELSS should find a place in the portfolio of every taxpayer, considering these schemes have offered great returns over a long period?

Gold over a long period hardly gives you any return. Real Estate with just 2 per cent rental yield is not tempting. With G-Sec (government securities) at 6.3 per cent, the best is behind you. Equities over the long term is likely to outperform other asset classes.

Do you think demonetisation drive is going to get more money into ELSS since many would be looking for legitimate ways to save taxes?

Demonetization has reduced interest rates and real estate prices are also likely to slump. The only choice you have is equities.

What is in store for the ELSS schemes in 2017?

All I can say is ELSS schemes are going to be volatile in 2017.

What should be the strategy for retail investors?

Investors should save and invest every month without fail.