ELSS & Mutual Funds, why one should consider them too

The first mutual fund scheme in India was launched by UTI in 1964; the mutual fund environment has changed much since then. As of Aug'15, Mutual Fund institutions in India had total assets under management (AUM) of  Rs.13.33 trillion. Out of which 45.5% was held by Individual investors (Source: AMFI).

Impressive. But consider the number of retail mutual fund accounts - 40.89 mlns. in a country with a population of more than 1.252 billion (2013). Okay, that is not a fair comparison to make. Considering NSDL + CDSL records indicate only about 21.5 mln demat accounts (couldn't get the data for retail investors). And a Bloomberg article (read here) indicates that less than 1.5% of India's population invests in the markets. But another article (read here) also claims that Indian households have about 20,000 tonnes of gold stacked away!! (Which explains why the government is so keen on monetization of this asset) If the retail investors have a capacity to buy gold, they might invest in MF as well.

Incidentally, the Government has also been keen on getting retail investors to invest in the stock market - the Rajiv Gandhi Equity Savings Scheme (2012-13) was announced for first time investors. But as of 31 Aug'15, only 50,200 accounts have been opened with CDSL / NSDL and not all of them have been invested in. Tax benefits on ELSS or Equity Linked Savings Schemes that offer tax benefits under 80C are comparable with PPF or NSC. Infact, ELSS only have a 3 year lock in period. Dividend income on Mutual fund is tax-free in India and there is no long term (held for more than 1 year) capital gains tax on equity MFs.

So why are investors wary of mutual funds? Risk perception of stock markets? The CRISIL-AMFI ELSS Fund performance index shows a return of 23.11% since inception, 13.54% for 5 years. (For overall statistics till Jun'15 - check this). Much better than the returns on Bank FDs or PPF. 

The only catch, if you can call it that, is that retail investors need to hold on for at least 5 years to get a good return. PPF has a 15 year term, NSC - 8 years? So 5 years is not a bad deal for better returns in this age when Bank FD rates are declining. Invest in a good mutual fund (after due research) and sit back and relax.

You no longer need a demat account to own mutual funds, you can directly buy from the fund house or a broker or an online portal. It makes sense right now to invest in one. And then, it also gives you the pride of investing in your country's businesses and contributing to their growth.