Pulling your investments from ELSS after the lock-in period is over is never a good idea. Let’s find out why.
Investing in Mutual Funds can be tricky without a doubt. With market volatility determining your corpus of returns, yields from your investments may not always meet your expectations. However, if you analyse carefully, Mutual Fund investments especially equity-linked ones trump traditional investments due to their hard-to-beat rate of returns (10-15%).
Ideally, your investment portfolio should comprise a combination of traditional and risk-prone investments like PPF, Fixed Deposits and Mutual Funds respectively. This way you can minimise the beating that your investments may take from a slump in market conditions or conversely, enjoy the windfalls when they pay off.
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What Should Be The Goal Of Your ELSS Investment?
Equity Linked Savings Schemes, or ELSS as they are more popularly known, are quite popular among investors since they help investors save tax and create wealth in the long run. While saving tax in the year of investment is an added benefit of ELSS, the primary goal of any ELSS investment should be to meet either a long-term objective, like retirement or children’s education, or a goal in the near future like buying a car or a house.
In fact, while investing in Equity Mutual Funds, one should aim for a long-term horizon that is not shorter than seven years. Remember, the longer the period of holding, the higher will be the extent of wealth creation.
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The ELSS Advantage:
While ELSS funds invest across market capitalisation, they are tilted more in favour of large-cap funds. The number of ELSS funds that have a high allocation to mid-cap stocks is only a handful in number.
A study carried out by Valueresearchonline, which analysed returns over the last five or ten years, found that these schemes are better than pure large-cap funds on a risk-adjusted return basis. This means that they can deliver higher returns with relatively lower volatility compared to large-cap funds. In essence, there is a long-term advantage of investing in ELSS over and above the tax advantage you receive in the year of investment.
The new categorisation guidelines haven’t spelt any new changes for ELSS. ELSS continues to have the flexibility to invest across market capitalisation. In fact, some investors invest beyond the amount required for claiming a tax deduction to maximise their returns.
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What To Do After The Lock-In Period Is Over?
Many investors are in a hurry to encash their ELSS investments right after their lock-in period is over and re-invest their dividends in a new ELSS to claim tax benefits that year. This is not a good idea as your investments will hardly grow to your fund’s benchmark within this short span thereby putting your future financial goals in jeopardy.
In fact, your returns may even be negative or sub-par. After the expiry of the lock-in period, you should review the performance of the scheme and if it has fallen way shorter than the benchmark denotes, shift your investment amount to another open-ended equity fund in order to clock better returns.
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Holding your investments in ELSS for the long-term can also help you achieve financial discipline especially if you’re investing through SIP besides reaping the benefits of rupee cost-averaging that it makes possible.
You should consider encashing your ELSS investments only if a sudden financial emergency demands it. But unless you need it, you may redeem a small portion of the investment instead of the whole amount. After the initial lock-in period of three years, an ELSS investment becomes open-ended and there is no exit load or incidence of a tax.
Still new to investments and don’t know where to start? You can start investing in Mutual Funds through SIP with as little as Rs. 100!