Does it add value to invest in ELSS after exhausting your 80C limits? - Motilal Oswal
Does it add value to invest in ELSS after exhausting your 80C limits? - Motilal Oswal

Does it add value to invest in ELSS after exhausting your 80C limits?

Out of the many options that you have to save tax under Section 80C, one of the most important is the ELSS fund. This is an equity mutual fund that is specially issued for tax saving purposes and offers rebate under Section 80C of the Income Tax Act. However, this comes with a lock-in period of 3 years which is still attractive if you compare with the much longer lock-in periods that you have in other products like long term FDs, PPF and ULIPs.

As we are aware, there is no upper limit to your investment in the ELSS. Of course, your overall limit under Section 80C will be limited to just Rs.150,000/- per annum. But you can invest any amount in ELSS schemes even after you have crossed the Section 80C limit. In fact, for young earners who have just about started paying tax, ELSS is a very powerful tool for combining tax saving and long term wealth creation through equities.

ELSS has some distinct advantages as under..

Being equity linked funds the ELSS tends to create wealth for shareholders over the lock-in period of 3 years.

Since there is a lock-in period for these funds, fund managers have the leeway to take a long term approach to their investments. That is because liquidity requirements are not as high as normal equity funds. This aligns the goals of the fund manager and the investors better.

It instils an equity cult early and also instils the discipline of long term investing in investors at an early stage. This helps them create wealth in the long run.

Can we invest more than the Section 80C limit in ELSS Funds?
Let us say that you have investable surplus funds of Rs.2.50 lakh with you. Out of that you invest Rs.1.50 lakh in ELSS funds to get the full benefit of Section 80C. Now can you invest the balance also in the ELSS funds? After all, there is no upper limit on how much you can invest in an ELSS each year. Since ELSS comes with a lock-in period of 3 years, they will automatically outperform the index considering that fund managers will also take a long term view and hold on to lesser liquidity. You decision should be driven by the following 3 factors..

An ELSS fund has a lock-in period of 3 years. It does not matter whether you are using the fund to get Section 80C benefits or whether you have already exhausted the Section 80C limit. Either ways, the lock-in period of 3 years will still be applicable. That means you are locking in your liquidity for a period of 3 years without any commensurate benefit in terms of tax exemption. That should be your primary consideration.

Your allocation to ELSS is part of your equity exposure in your overall financial plan. You need to take this decision based on the total exposure to equities that your financial plan warrants. By over investing in equities via ELSS you may find yourself stuck in an equity asset that does not have an exit route for a period of 3 years.

There is really not visible return advantage in ELSS over diversified equity funds. If you compare the top-10 funds in terms of 5-year returns, then the difference between equity diversified funds and ELSS funds is almost marginal. The question then is why you should take the liquidity risk of locking in money in an ELSS fund when you can get the same equity benefits from diversified equity funds itself. That is one of the key points that argue against investing in ELSS beyond the Section 80C limit. If you have a surplus and you still have space for equity allocation in your financial plan, then you are better off opting for diversified equity funds compared to an ELSS fund.

The moral of the story is that investing in equity funds beyond the Section 80C limit does not add much value for you as an investor. On the contrary, it exposes you to liquidity risk without commensurate returns compared to the more popular alternative. As an investor you are better off just sticking to diversified equity funds once your Section 80C limits are exhausted. In terms of value addition, ELSS does not offer much of a benefit beyond the tax angle!
 

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