The ELSS category has added over 22 lakh folios in the last two years. Folios in this category have grown from 1.23 crore in December 2020 to 1.46 crore in December 2022. (Source: AMFI)
What makes ELSS funds stand out?
ELSS funds offer dual benefits of tax savings and potential to generate wealth over the long run. Over the long term, equity has generated better returns than most other asset classes. Further, ELSS has the lowest lock-in period of three years as compared to other tax-saving avenues under 80C.
One advantage of this lock-in, which often goes unnoticed, is that it prevents you from withdrawing when market is volatile, which may work to your advantage to create wealth. The end of the three-year lock-in period does not necessarily mean you have to sell out from the fund as an ELSS can be a good way to meet your long-term goals like retirement.
Should you opt for SIP or lumpsum?
Investors typically rush to save taxes at the end of the financial year. By investing towards the end of year, we lose the advantage of time and invest even when valuations could be high.
Equity as an asset class tends to be volatile and if you invest at the wrong level, when risk-reward might not be favourable, it may result in earning suboptimal returns.
Markets respond to a number of factors – domestic and international. Who could have predicted a global downturn caused by the pandemic? It is very difficult to time the market. Another hurdle we all face is tackling our behavioural biases while investing. Investors tend to encounter greed and fear which prevent them from making rational decisions. So, what is the way out?
Systematic Investment Plan allows investors to invest in ELSS, by spreading their investment throughout the year. Investors can decide in advance as to how much they wish to invest and start an SIP. As the money is invested throughout the year, the cost gets averaged out. SIP offers two benefits – helps you avoid timing the market and overcome emotions.
Lastly, planning your tax-saving in advance helps ease out any undue pressure on your household budget. In addition to saving taxes, SIP also inculcates the habit of saving regularly to meet your long-term financial goals.
Due to these reasons, SIP may not only enhance your potential to earn better returns but also reduces the impact of market volatility and inculcates investment discipline.
(Srinivas Rao Ravuri is CIO of PGIM India Mutual Fund)
