ELSS funds: When tax-saving meets long-term wealth creation

Investments, equities, mutual funds, and savings - are all buzzing discussion topics among the working population, these days. And it’s that time of the year when we all go about our tax filing. There is nothing we love more than tax-saving options. But the problem with traditional tax saving investments is that they either have an extended lock-in period or offer low returns.

What if an investment option existed to save tax and create wealth simultaneously in the long term?

Yes, we do have - ELSS

Equity Linked Saving Scheme or ELSS has emerged to be one of the attractive investment options recently. But what makes ELSS more attractive? The beauty of these schemes is that it helps you to create wealth in the long term apart from offering tax benefits.

Also Read | Old v/s New: A primer on choosing the right tax regime

How? Let’s find out.

Smart tax saving

To understand this better, let’s take an example. Let’s say you buy 3,000 units of an ELSS fund at a net asset value (NAV) of Rs 50. Investments in ELSS are eligible for a tax deduction of up to Rs 1,50,000. So, at the basic level, you are eligible for up to Rs 46,800/- tax rebate. But hold your breath!! ELSS has more than that.

Lock-in is for a good reason

One of the key features of ELSS funds is that they have a lock-in period of three years, which means that the investor has to hold on for at least three years to liquidate their investments.

This ensures that the investor remains invested for the long term and does not get swayed by short-term market fluctuations. Probably, this is the reason why ELSS outperforms other equity funds in long term.

Role of a fluctuating market

When the market is low, ELSS funds can purchase more units of the underlying stocks at a lower price.

This is because the fund’s NAV is directly linked to the value of the underlying stocks.

Consequently, when the market recovers and the underlying stocks’ value rises, the NAV of the fund will also increase, resulting in a higher return for the investor. It’s a win-win situation for a longer period when the market travels through different phases.

Cushion for fund managers

Equity-linked savings schemes (ELSS) invest primarily in equity shares of companies. As I said earlier, the pile of money is locked in for three years, during which the investor cannot withdraw their money. This feature helps to align the interests of the investor and the fund manager, as the manager gets the cushion and can focus on long-term performance rather than short-term fluctuations in the market.

Take a “pause” when pockets get hard

The “pause” option in an ELSS investment allows investors to temporarily stop making contributions to their investment without completely terminating it.

This feature can be useful for individuals who may be experiencing financial difficulties and are unable to make regular contributions but wish to continue participating in the market growth of the investment.

The value of the investment will then be subject to the usual fluctuations of the market, and the investor will
continue to earn returns on their investment.

This way they can take advantage of market growth that they would have missed if they had completely withdrawn the investment or closed it.

Evidently, ELSS yields more returns than other traditional tax-saving instruments, thanks to the power of compounding.

Not to mention the 80% diversified equity assets in ELSS, historically, returns on ELSS have always beaten inflation in long term. Investment in ELSS can be made with as little as Rs 500 monthly systematic investment plans (SIPs).

With the SIP mode of investment, you can enjoy the benefits of rupee cost averaging, can do investments at your convenience and inculcate disciplined investment habits.

By visualising a long-term wealth creation with tax savings, ELSS can be your ideal long-term wealth creation option.

(The author is the chief executive officer of FundsIndia)