Don’t shun ELSS because of market volatility; they can still reward you

Some mutual fund investors are having second thoughts about investing in Equity Linked Saving Schemes (ELSSs) this year to save taxes because of the uncertainties haunting the stock market, say mutual fund advisors. According to these advisors, investors are making a big mistake as ELSS or tax saving/planning mutual fund schemes still have the potential to offer superior returns than other investment options permitted under Section 80C of the Income Tax Act.

Investments in an ELSS qualify for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. ELSSs, which come with a mandatory lock-in period of three years, invest their corpus in stocks and have the potential to offer superior returns than other asset classes over a long period. Most of the other investment options permitted under Section 80C are government-backed and they offer modest tax-free returns.

However, some cautious investors can’t see beyond the current volatility in the stock market. The market has seen a correction of nearly 8 per cent since February. This has forced many investors to re-think about their investments in Equity Linked Saving Schemes. The net inflows into the ELSS category dropped Rs 1,585 crore in February, from Rs 1,986 crore in January.

According to mutual fund advisors, investors should learn to ignore short-term volatility in the market if they want to create wealth over a long period. Investors should focus on their long-term financial goals and invest in equity schemes, including ELSSs, without worrying about the current market conditions to achieve their long-term financial goals, add advisors.

Advisors point out that irrespective of the short-term volatility, ELSSs have given attractive returns in the long term. ELSSs have given an average return of over 13 per cent returns in the last one year. In the past three years, ELSS category returned 10.51 per cent. In the longer-term, these schemes provided 18.82 per cent and 20.12 per cent returns in five and 10 years respectively.


According to mutual fund advisors, though past returns do not guarantee future returns, the data point out that ELSSs have the potential to offer superior returns over a long period. Other traditional favourites like Public Provident Fund and National Saving Certificate Scheme offer only modest single-digit (around 8 per cent) returns. These schemes also have longer lock-in period than ELSSs.

Mutual fund advisors ask investors to link their long-term financial goals with their ELSS investments and hold on to the investments even after the lock-in period is over. Provided, the scheme is performing well.

Also, read: Best tax saving or ELSS funds to invest in 2018