Why ELSS Funds are Worth the Risk?

01 Aug 2019

Equity Linked Saving Scheme (ELSS) come with equity related risks because these tax saving mutual funds invest in the stock market. Even the best ELSS funds can see erosion in the value of their portfolio if the markets go through a bear phase.

The performance of ELSS funds depends on the companies that they invest in. You can reduce the risks associated with a single stock by diversifying the portfolio of ELSS funds. These funds are a risky investment, however they are worth the risks. ELSS funds have certain advantages as compared to other tax saving investments and thus these funds are a recommended investment avenue by experts.

Let us examine these benefits of ELSS in greater detail:-

Equity performs best over the long term: Equity has outperformed fixed income investments over the long term. The returns offered by PPF and FD’s are around 8% and this kind of return will not help you beat inflation. The returns that you can expect from ELSS funds are in the range of 12% to 15% over most ten year periods. This will help your invested capital to be protected from erosion and also let you earn higher returns.

Tax-free returns: The returns earned on the investment will be tax-free for you in an ELSS fund. You can invest up to 1.5 lacs in ELSS funds to save taxes under Section 80C and thus these funds are one of the finest tax-saving investments.

Lock in period only for 3 yrs: ELSS funds are locked in for at least 3 years. Which means, in an ELSS fund, you are obligated to stay invested for 3 years or more to get exemption from taxes. In comparison, tax saving FD’s come with a minimum lock-in period of 5 years, while in the case of PPF, it is 15 years.

Long term equity investment: Although the lock in period for ELSS is 3 years, you can allow the continuous growth of your fund for longer or redeem after 3 years. These funds invest your money in equity, which means that you possess chances of higher returns alongwith with tax exemptions.

Highest flexibility: You can expect longer lock-in periods for fixed income tax saving investments. You can stop investing in it anytime even though the funds come with a lock-in period. You can move on to another fund if your investment in an ELSS fund does not perform well.

Quality saving habit: ELSS schemes allow you to invest systematically with as low as Rs. 500 per month so your savings turn into your investments. This inculcates a habit of continuous investing.

Equity Investment while saving: ELSS also allows you the benefits of equity gains which ride the growth cycle of economy in your portfolio. Where conservative savings instruments can yield about 8% returns, investing in equity may produce higher returns in favorable situations in the stock market. In a rising economy like India, a good portfolio with quality stocks may reap higher returns.

Equity investors are usually a lot more cautious about losing money seeing its volatility and associated risks in the market. But smart investors, on the other hand, are cautious about saving money and investing with a longer term perspective. ELSS is ideal for the investors who wish to save tax, but have higher risk appetite and want better returns than Fixed Deposits or PPF.

Hence, though risky by nature, ELSS Funds do offer the possibility of higher returns also.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.