ELSS are mutual fund schemes that invest predominantly in equities, provide tax benefit under Section 80C up to Rs 1.5 lakh and come with a lock-in period of three years on the investment made.
Time is running out for those who want to invest in a tax saving mutual fund scheme, also referred to as equity-linked savings scheme (ELSS). The last date to save tax for the financial year 2021-22 is March 31, 2022, and if you have not yet completed tax planning, you need to hurry up. By investing in ELSS, you can not only save tax but also let your money participate in the growth potential of equities. ELSS are mutual fund schemes that invest predominantly in equities, provide tax benefit under Section 80C up to Rs 1.5 lakh and come with a lock-in period of three years on the investment made.
But, is the right time to invest in ELSS? With markets still at a high even after a reasonable correction over the past few months, the changing dynamics of interest rate may throw a spanner in the stock prices upward movement. But, this and other factors affecting stock prices need to be taken in one’s stride. Over the long term, equities tend to drift upwards.
Sample this! Since February 2019, the market has moved up by almost 16.75 per cent, all this even after the stock market crash of March 2020. ELSS investors in February 2022 whose lock-in ends this month after investing in February 2019 have the option to redeem or continue as open ended scheme.
Also, for those investors who had invested in February 2016, till February 2019, the index had moved up by 14.50 per cent and has gone up by nearly 15 per cent in February 2022.
It shows that in spite of intermittent volatility, the equity indices tend to move upwards in the long term.
Over the last 1-year, 3-years, 5-years and 10-years, the ELSS category has generated a return of approxiametly 23 per cent, 19 per cent, 14.5 per cent and 15.45 per cent respectively. If your ELSS scheme has not been able to beat the market or its peers, it’s time to review and take action accordingly.
The best part of ELSS is that the lock-in works to the advantage of investors. Markets may not remain up always and one may find a 3-year return on the lower side. In such a case, it’s better to continue and wait for the market to go higher before redeeming.
The best or the top ELSS MF scheme may not not remain the best at all times. Today’s winner scheme may not even remain in the top ranking schemes in 3-5 years time. Therefore, picking the best fund based on short term performance is not the right way in selecting the schemes for the portfolio.
While selecting the right ELSS schemes, make sure you look at their long term performance and choose any consistently performing funds. Also, importantly, look at their sector allocation to avoid duplication. Holding 2 elss schemes with similar allocation to industries such as Financial, Technology and Construction may not help much.
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