The equity market in India seems to be picking up rapidly, with more than 140 lakh new investors joining the equity markets in the financial year 2020-21. (Source: TimesofIndia.com article dated: June 24, 2021/ Mint article dated: June 22, 2021) Many factors triggered this unprecedented surge, although it would be fair to say that most of these new investors were probably looking for alternatives to traditional investment instruments.
History suggests they weren’t wrong, as equities can help strengthen an investment portfolio and promote long-term wealth creation. Equity Linked Savings Scheme (ELSS) is especially effective for investors having a long-term view.
ELSS funds are essentially a type of equity-focused mutual fund. They invest primarily in equity and equity-linked schemes and save tax as well.
ELSS funds in India are eligible for deduction up to ₹1,50,000 under Section 80C of the Income Tax Act. Investors can invest in these funds to reduce their tax liability whilst earning returns. However, neither benefit can help your portfolio if your risk appetite and investing style do not fit with ELSS funds. Here are a few scenarios in which it is better to avoid investing in ELSS funds in India.
You want stable returns
As per SEBI, ELSS funds invest at least 80% of their assets in equity (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance), have a three-year lock-in period, and are eligible for deduction of up to ₹1,50,000 u/s 80C of the Income Tax Act.
Equity funds can potentially help generate long-term wealth when the time horizon is longer.
However, the stock market is volatile by nature. There are chances that the ELSS fund you invest in might not perform well if the overall market isn’t performing. Thus, you may have to be prepared to weather through the volatile phases, where your returns could potentially be lower or deliver negative returns. But if you want stable returns like traditional investment options, ELSS may not be the ideal choice.
You are affected by the news
The media regularly covers the stock market. Rumours surrounding a sector or company are tracked as rigorously as the actual news itself, and they can have a ripple effect on stock prices.
Since the ELSS funds in India operate in the public market, they are affected by media reports. They might react to any news about the stock they have invested in, which might increase or decrease your ELSS portfolio. While it is advised to ignore media reports and stick to your ELSS investment plan, avoid investing in them if you are affected by the noise in the media.
You want immediate access to funds
While liquidity is one of the best features of equities, ELSS funds do not offer immediate access to funds. Once you invest in an ELSS tax mutual fund, your money is locked in for three years. The time period is non-negotiable, which means you cannot remove the invested amount until after three years.
Hence, if you want the option of premature withdrawal, you may not want to invest in ELSS funds.
You want short-term gains
Equities are wrongly stereotyped as a get-rich-quick scheme. The truth, however, is equities have the potential to generate a sizable wealth corpus in the longer term. Staying invested in them through ELSS tax mutual funds can positively impact your portfolio and help you achieve your financial goals.
Chasing quick returns through ELSS funds might not always work, and hence, you should not invest in ELSS funds if you want returns quickly. ELSS funds may be suitable for you only if you have a longer investment horizon.
An ELSS fund is an effective financial instrument to save tax and earn decent returns. However, you need to be aware that you are not investing in it with the wrong expectations. It would be a good idea to read up and gather knowledge about ELSS funds, how they work, and whether they fit your investment style, and then go ahead with your investment plans. It is best to consult your financial advisor before making any decision.
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Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.