scorecardresearchAre markets corrections the right time to buy ELSS funds?

Are markets corrections the right time to buy ELSS funds?

Updated: 25 Mar 2022, 02:47 PM IST

Equity linked savings scheme is seen as a good bet to make long-term investment during market correction phase

Unlike other investment schemes, ELSS doesn’t require investors to make recurring investments and has only three years of lock-in. 

Unlike other investment schemes, ELSS doesn’t require investors to make recurring investments and has only three years of lock-in. 

As financial markets are reeling under volatility of colossal proportions, small investors are advised to explore equity linked savings scheme (ELSS) as one of the vehicles to get exposure to equity.

“This is the right time to invest in ELSS funds. On one side, the markets are being corrected. At the same time, stocks have already come to a reasonable price,” says S Sridharan, founder and principal officer, Wealth Ladder Direct.

These funds invest a minimum 80 per cent in stocks. Much to the delight of investors, investment up to a maximum of 1.5 lakh also entitles tax payers to seek tax deduction under Section 80C of the Income-Tax Act.

Also, this is one of the few saving instruments heavily inclined to equity. Experts opine that these funds are better over other saving schemes in more ways than one, particularly for investors with a high-risk appetite.

“ELSS funds are suitable for investors who are willing to take risk. Importantly, this is the only instrument with a short lock-in period of just three years. The other fixed income instruments have longer lock-in such as PPF has 15 years, and tax-saving FDs have five-years. Insurance products, too, have a minimum of five and a maximum of 15 years of lock-in,” adds Sridharan.

Returns posted by top ELSS funds

ELSS Funds1-year return  (%)3-year return (%)
IDFC Tax Advantage (ELSS) Fund   26.59   22.98
BOI AXA Tax Advantage Fund23.16   27.72   
Quant Tax plan40.95   36.75 
Mirae Asset Tax Saver Fund  19.16   23.53
Canara Robeco Equity Tax Saver Fund20.29   23.92

(Source: AMFI; direct returns as on Feb 28, 2022)

However, before choosing a fund to invest based on their past returns, investors must ensure that they don’t choose a fund only because it was the highest-paying fund last year. They should – instead – choose the one that performs consistently year after year.

He further says that the fund category – large cap or mid cap — should be mapped to your financial goals. “When you have a financial goal coming up in the next three to five years, investors can choose large cap ELSS fund, whereas when a goal is scheduled in the next 5 to 7 years, one should ideally choose a mid-cap ELSS fund,” says Mr Sridharan.

Returns posted by ELSS vis-à-vis other category funds

Category1-year return (%)3-year return (%)5-year return (%)
ELSS38.06 20.25 16.85
Large cap25.90   17.0015.42
Mid cap44.62 22.54 18.43
Flexi cap31.86   18.72   16.72

(Source: Mutual Fund Screener Dec 2021, ICRA Analytics)

Some experts, however, caution that market correction should not be seen as the only reason to invest in ELSS. The key reason to invest in ELSS should be a scope for equity allocation

“If investor’s portfolio warrants equity allocation, then ELSS is a good investment, otherwise not. And if this criterion is fulfilled then the second thing one can consider is the good timing,” says Renu Maheshwari, Investment Advisor & Co-founder, Finscholarz Wealth Managers. “And this is the good time to invest in equity.”

First Published: 25 Mar 2022, 02:40 PM IST