2-Tax saving By Equity Linked Saving Schemes ELSS - Part II

This is part II of the article . Please read the part I of the article before continuing with this section.

Let’s compare the returns of this fund with NiftyBees ETF over the same investment horizon. For more details on ETFs and how they work, please read my following articles: The Simplest Investment Strategy and ETF-an Example.

Three years back, on 2nd August 2004, NiftyBees had a closing value of 164.75 Rs. While yesterday, on 2nd August 2007, the closing value for NiftyBees ETF was 440
Percentage Increase in NiftyBees Fund value: (440 - 164.75)/164.75 = 166.8%. Simple average annual return = 166.8%/3 = 56.1% Hence, over the same period, the best performing ELSS scheme produced an average annual return of 99.4%, while an equivalent ETF generated 56.1% returns only. The ELSS scheme has clearly outperformed the Nifty Benchmark Index by almost double the value, if we take into considering the one time tax savings in case of ELSS.

So it seems that ELSS schemes are a better choice than ETFs. However, what we have ignored in these calculations is the commission and administrative charges that are there in ELSS. Even if we consider those charges, then also the performance of HDFC Tax saver ELSS would be far better than that of ETF.

Have a look at another time horizon now – say last one year, from 2nd August 2006 to 2nd August 2007. In this period, the Nifty increased by 41.5%, while this best performing ELSS scheme had a NAV increase for only 37.78%. Deduct the cost of commission and charges in ELSS, and the difference would increase some more.

Ultimately, what we can conclude from these 2 different yet opposing results of our analysis? I am not gonna tell any new thing. It’s the same old reasons that I am going to give. It is easy to do analysis on HISTORICAL DATA and justify how and why this scheme WAS better than the others. What no body can tell is how a particular scheme will perform in the future. Measuring the performance of 2 schemes over the past years is easy – predicting the future is impossible.

One thing to remember is that we are taking the BEST PERFORMING ELSS scheme for our analysis. There are numerous other similar ELSS schemes that have performed miserably. Mediocre performer like ICICI Prudential tax plan scheme has produced only a mere 23% return as compared to the 41.5% return of ETFs. Which scheme would you choose, how will the fund manager act with your money, and most importantly, historical performance does not guarantee future returns, are a few of such questions that leave us on the cross roads of decision making, when it comes to selecting the investment products.
Continue to Part III of this article