When not to invest in Equity Linked Saving Schemes (ELSS)
Equity Linked Saving Schemes popularly known as ELSS funds are still
struggling in the Indian market to establish themselves. Many investors, who
are afraid of the equity market, choose life insurance or Provident fund to
save tax. These products are few
decades old and are very popular among Taxpayers. However, due to increase
in the inflation and lower returns, these products are losing their market
share. Investors are now looking for those products which offer growth in
the long term and helps in wealth creation. ELSS is one such product which
offers both, but due to the risk/Volatility associated with the product,
people hesitate to invest in it.
Few question before investing in ELSS
For a longer duration, any product which generates returns over and above
inflation is good for investor and in the category of tax saving
instruments, ELSS funds are best in the lot till date. But are these funds
always good for an investor? Does this fund suits every category of
investor? Are these funds successful in generating good returns in the short
term? Have you ever thought about these questions while investing or just
invested because you need to save tax? Let us today try to focus on above
questions and find out which category of investors should avoid these funds
and also in which situation one should stay away from ELSS funds.
Think Before you invest in ELSS funds
Post Retirement
All those investors who are senior citizens or retired and are looking for
the investment schemes should try and avoid ELSS funds as tax saving tool.
Post retirement is a phase where one should look out for those schemes which
offer both liquidity and tax saving with fixed returns. ELSS fund comes with
3 years of lock in and is highly risky if you don't understand volatility.
Also, as there is no guarantee on returns, there are often chances that
investor may lose the part of its capital. [we suggest even in retirement
people would have decent exposure to open-ended diversified equity mutual
funds based on risk profile & requirement - but after understanding risk
associated with that]
Investor's Risk profile is conservative
If an investor's risk profile is moderately conservative then he/she should
not invest in ELSS funds, as these are highly volatile and does not
guarantee returns. The conservative investor always looks for growth with
security and a slight decline in portfolio makes them worried. So, they
should look at other tax saving products which are less volatile and should
ignore ELSS funds. [we may also suggest that if you are conservative
investor & literally hate equity & volatility - this year add some amount in
ELSS]
Investment horizon is less than 5 years
If an investor has a goal which is of less than 5 years then he/she should
ignore ELSS funds as a part of equity investments. These funds have a
multi-cap portfolio which invest aggressively into small and mid-cap and
thus bears high risk. Ideally for a period of 5 years for equity one should
only consider large cap fund which are less volatile than ELSS funds.
[saying 5 years for equity funds doesn't mean that it will not be negative
if you hold for 5 years]
Investing at the end of Financial Year
Most of the time people look for tax saving products only during last
quarter of the financial year. It is the time when they (Employees) are
forced to submit their investment details and thus in a hurry they invest in
ELSS in lumpsum. Ideally, this is the wrong way to invest in ELSS. One
should always plan their tax related investment in advance and invest
through SIP mode in ELSS to get the benefit of rupee cost averaging. [it's
not about performance but discipline]
What should you do?
To conclude, investors should avoid ELSS funds if they are looking for short
term and are not comfortable with equities. However, one should also keep in
mind that ELSS funds are not at all bad. In fact, ELSS is the best tax
saving option available in India but only for those who are looking for long
term and have the capacity to digest volatility. And for rest National
Saving Certificates or Tax-free FD or PPF would be better as these are less
risky (without considering inflation) and offer fixed interest. [if your
income is less must invest some portion in ELSS for tax saving]
