Saving Tax With ELSS? Try Direct ELSS Funds For Better Returns

By | February 15, 2017

Saving Tax With ELSS? Try Direct ELSS Funds For Better Returns

ELSS (Equity Linked Saving Schemes) funds are Mutual Funds that also act as tax-saving instruments under Section 80C. You can invest in one or more ELSS funds to claim tax deductions up to Rs. 150,000 in a financial year.

Overview of ELSS funds

ELSS funds are offered by most Mutual Fund houses. These funds offer tax-saving benefits as well as returns from the fund’s underlying equities. ELSS funds also have a three-year lock-in period. Once invested, you can redeem your ELSS units three years after the Investment date.

What are Direct Funds?

A lot of Mutual Fund investors depend on Mutual Fund agents or aggregators. In lieu of their services, these agents or distributors receive a commission. Usually, the fee is about 0.25% to 1% of the investment value. Needless to say, this charge marginally lowers your returns. This variant of a Mutual Fund is called a Regular Plan.

Another way to invest in ELSS, or any other Mutual Funds for that matter, is through the variant known as Direct Plans. While the underlying assets of both direct and regular plans are the same, the returns vary.

Direct plans are sold to you directly by a fund house, and not through an intermediary or agent. This means you will be able to save on commission costs. This in turn positively impacts your returns, which will now be marginally higher. This means your savings and returns could be significantly better in the long-term.

Additional Reading: How To Pick Good Mutual Funds

Regular and direct plan returns. What’s the difference?

With the help of the following example, we can show you how your returns are affected with respect to direct plans.

Let’s say you invest Rs. 1 lakh in a regular plan where you pay 1% towards agent commission and 1.5% towards management fees (also called expense ratio). Your total expense in a year is 2.5%. This means the money that goes into your investment is Rs. 97,500. If the fund returns 20% in a year, your investment will appreciate to Rs. 1.17 lakhs.

On the other hand, if you invest in a direct plan, your expense will be just 1.5% towards management fees. This means Rs. 98,500 goes into your investment. Since the underlying Mutual Fund is the same, your return will be 20% and the investment will appreciate to 1.182 lakhs.

Since we are discussing ELSS funds wherein a lock-in period is prevalent, let us look at the value of the investment after the three-year lock-in period is complete.

Your investment, as mentioned above, will appreciate to Rs. 1,70,208 in three years under the direct plan as compared to Rs. 1,68,480 under the regular plan.

This difference may not seem like much, but over the long run, the difference can widen considerably, especially if you’re investing through a long-term systematic investment plan.

Additional Reading: 10 Benefits Of Investing In Mutual Funds

The difference in case of SIP (for any Mutual Fund)

Let’s give you another example. Assuming the same commission of 1% and a management fee of 1.5%, a monthly SIP of Rs. 10,000 in any direct Mutual Fund giving a CAGR of 12% p.a.will appreciate to Rs. 24.4 lakhs in 10 years, while it will be about Rs. 23 lakhs in the case of a regular Mutual Fund.

The difference between the two will be Rs. 1.4 lakh. Continue the same for another 10 years and we are looking at a whopping Rs. 14 lakh difference. This is the impact regular and consistent investing can create in the long run.

Additional Reading: SIP Investing In Mutual Funds

How to buy a direct plan

Mutual Fund houses offer several variants of their funds to investors. To buy direct ELSS plans, you can register online with a fund house or walk into a branch with your KYC documents. You can also interact with the fund house to better understand the benefits of direct plans.

Now that you’ve been brought up to speed about investing in direct ELSS funds, check out this layman’s guide to help you get started.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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