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Who should still consider investing in ELSS funds, and why?
The case for ELSS funds (or tax-saving funds) is very simple and compelling, particularly to my liking. I'll tell you why. First, this is the only tax-saving avenue that gets you growth. With ELSS funds, you have the potential to become wealthy over time.
Second, a tax-saving fund has a three-year lock-in period. This helps newer investors stay disciplined on their wealth-building journey. After all, most investors make the mistake of exiting their investments prematurely, which is why they aren't able to create immense wealth through equity funds.
You have to get acclimatised with equities. This is the finest vehicle, and I know many people who over the last two decades started with only tax-saving funds. They could not invest more but continued in a disciplined way. Now they are wealthy, having created a retirement fund entirely because of their tax-saving fund investments.
With the new tax regime and no mention of 80C, what's the point of saving taxes?
The New Tax Regime offers lower taxes and is much simpler. However, there are no tax-saving avenues. Tax saving was a great incentive for investors, encouraging them and helping them form a habit.
That's why, there should be some provision. If NPS is made mandatory instead of the provident fund, that could be one such idea. Increasing the limit there is crucial because NPS is similar to ELSS, with a longer lock-in and potentially similar returns.
However, ELSS funds were attractive and habit-forming, and in the new tax regime, the lack of tax-saving investments can de-incentivise investors.
Do you think ELSS funds will phase out?
They will continue until the old regime continues. If 80C is done away with, these funds will continue as long as the money lies there. These are open-end funds, and investments have a lock-in only for the first three years. After three years, these funds essentially become normal, diversified equity funds for any investor.
Can you elaborate on their historical performance compared to other investment avenues?
It's straightforward. ELSS funds have performed twice as well as the Public Provident Fund, which is a barometer of fixed-income returns in this country. Even in the worst times, ELSS funds have given 20 per cent more, and in the best times, two and a half times more.
Hypothetically, if you invested Rs 1.5 lakh annually in the Public Provident Fund for 15 years, it would accumulate to around Rs 28.5 lakh. In the same period, the worst-performing tax-saving fund would yield around Rs 48-50 lakh, while the best-performing fund would yield Rs 1.82 crore, with corpus ballooning to Rs 85-86 lakh in an average ELSS fund.
When thinking long-term, equity is the way to go. ELSS funds have been a great coaching institute for learning equity investing and overcoming the fear of it.
Suggested read: Make your tax-saving investments equity-based
Will they still remain relevant?
They will remain relevant as long as the old regime continues. The new tax regime is attractive only after crossing a basic threshold. New taxpayers with lower incomes have entitlements like home loans. For them, the old regime might be relevant, but for most new investors, the new regime is more attractive. However, in the initial years, making tax-saving investments in ELSS helps form a habit that becomes rewarding in the long run.
Viewer's Question
"I have a surplus of Rs 50 lakh in a liquid fund which is not required for at least three years. I can take maximum risk for the highest return for the next three to five years. Should I invest through a lump sum or SIP?"
Three to five years is not a very long period, so be conservative. You can take risks, but you wouldn't want to lose any capital. Invest only 15 to 30 per cent into equity, with the remaining 70 to 85 per cent in a short-term debt fund. This way, even if equity performs poorly, the debt will grow enough to avoid major regrets. Spread the equity portion over the next six months to one year, and diversify. Avoid exotic bets.
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Also read:
ELSS funds: Losing appeal but not utility
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