Equity Linked Saving Scheme (ELSS) – A great way to start equity investing
For a retail investor, fear of losing money is one of the biggest concern which keeps them away from equity markets. ‘Market toh ekk juuaa hain’, I have heard numerous times while interacting with young investors as to why their 100% portfolio is in pure debt in spite of young age and with all the time they have at their side to invest aggressively and achieve their goals. With a growing economy like India, wherein over the years FII’s and DII’s have made a huge fortune, retail investors still have a lot of catch up to do. Even if the risk profile of an investor is conservative, a certain percentage of equity allocation is imperative to achieve medium to long-term goals.
As a young first time investor, as you get your first cheque, investments and creating wealth is never on your agenda. A Systematic Investment Plan (SIP) will be a financial masterstroke which will pay your rich dividends in the years to come. The amount is not significant with which you are starting your SIP, inculcating that habit to keep investing month over a month without fail via SIP is the key. This brings discipline towards the way you manage your salary, a big challenge for the youngsters most likely to splurge on the items which may be good to have but not a necessity. In addition, this will also develop their confidence in equity markets and how a certain percentage of equity allocation can do wonders for their financial well-being. Most of the investors, realize this as they approach 40’s and view not starting investing early as a big investment mistake which they wish they can revert. Compounding will not play that effect if you start at 40’s than in your 20’s.
Another key area of concern is first-time investors are drawn into investing in products which may not be best for them. As a youngster, it’s easy to sell traditional insurance policies, endowment plans, insurance-sum-investment products to you which may not be the best option available to them. Misselling is rampant these days which every investor should be critical about. Once you are convinced of investing in such low return policies, high upfront charges, necessary lock-ins will make sure you keep investing in this inefficient financial products for long, reducing your invisible surplus also in the process.
Equity Linked Savings Schemes (ELSS) is one of the great ways by which investors can begin their investment journey in the equity markets. Such a step will fulfill the dual purpose of tax saving and more importantly create wealth for an investor in the long term.
Equity Linked Savings Schemes (ELSS) are closed-ended mutual fund schemes, with a 3- year lock-in. They offer tax benefits under the new Section 80C of Income Tax Act 1961. Such schemes are the best way for a young investor to start investing in mutual funds and have an equity allocation in the portfolio for the first time. Since the investment is market linked, it carries inherent risk but if you are investing for a long time, market volatility and downturns in the market will work wonders for you as regards end corpus you end up with.
Some of the good ELSS schemes have delivered excellent returns to investors over a long period of time. These schemes can very well be used for wealth creation, while many investors still see them as a way to save tax only. Additional lock-in of 3 year makes sure you don’t panic initially when market tanks and keep investing without redeeming them. Also, it gives the fund manager, a bit of extra leg room to make a bit longer investment calls.
Many investors choose traditional investment options such as Public Provident Fund (PPF) or tax saving FD’s instead of opting for equity allocation. While PPF is an excellent debt investment option, an equity allocation at an early age can prove very beneficial. If you still averse to investing in equities, start with a smaller SIP and keep investing rest in PPF. As you gain confidence that it, in fact, is a great investment option, increase allocation in ELSS funds accordingly. Do remember the end corpus, along with compounding impact is also a function of how much you have invested. So increase your SIP whenever your finances warrant it but it is always recommended to increase them as your salary increases. There is no direct comparison between PPF and ELSS schemes, as one is pure debt investment which is secure from market volatility and fully tax-free on redemption. ELSS schemes, though having a risk and volatility factor included due to equity product and 10% taxable under LTCG have still great potential to deliver good returns over the long term.
Do remember, among equity-linked savings scheme, all schemes are not large-cap oriented. There can be schemes which primarily invested in MNC companies or tax saving funds which take aggressive mid-cap bets. Many investors have the perception that all ELSS schemes have an identical investment mandate. So make sure you evaluate scheme offer document before you invest in line with your risk profile and overall investment portfolio. In addition, don’t introduce too many ELSS schemes in your investment portfolio. Depending on how much you want to invest yearly, take necessary decision. Not more than 2 ELSS schemes should be ok. Over-diversification also works against you in the long run. There have been times when schemes have underperformed for an extended period of time and investors have stopped SIP midway. It happened to Axis Long Term Equity in the past which is now one of the best ELSS funds. Same is happening to Reliance Tax Saver Fund now which is underperforming as compared to its peers. However, over a long term, it has been a wealth creator. So, as an investor, knowing the nature of the fund and the fund manager philosophy inside out will make you stay put with the fund for the long term, even during the fund’s underperformance.
Another common investment mistake investors do make is to redeem your ELSS investments as soon as lock-in is over. If the fund is performing well and giving you rich dividends, why to abruptly stop the process? Never ever be in such an eagerness to redeem your investments.
Many investors stop their tax saving SIP’s as they buy a new home and home loan principal takes care of Section 80C investments. While there are varying theories as to why to lockin the amount in ELSS funds (and not invest in open-ended schemes instead) in such a case, there’s always a risk of breaking the continuity of wealth creation. Investors should individually evaluate if there’s a need to stop sips in ELSS schemes. Stopping something which is doing well may not be smart this to do.
Align your ELSS schemes investments into your financial goals. As an investor, you must make sure, like for any other investments, you should also map your ELSS funds to specific financial goals. Not doing this carries an inherent risk of you redeem them as soon as lockin is over or randomly at some point in time. Make sure you always have a purpose behind every investment you make.
Last but not the least, there are investors who say ‘No’ to equities outright even at a young age. Investors must spend time trying to read, view and understand informational content about the various options available for investment, their pros and cons, which investment includes what risks, evaluating own risk profiles, goals one want to achieve and what kind of returns your investments should generate for you to achieve the goal. Evaluate and spend some time. Outright saying ‘No’ can rob you of great investment opportunity early in your career which you may repent maybe a decade after.
Just to share testimony why ELSS funds are often forgotten but an effective way to start your investment journey is below:
|Particulars||1 Year||3 years||5 years||Since Inception|
|Total Amount Invested||120000||360000||600000||1260000|
|Market Value of amount Invested||130514||479819||985591||3361921|
|Scheme Returns (CAGR)||16.65||19.58||19.95||17.70|
|S&P BSE 200 TRI returns (CAGR)||20.96||19.45||16.65||14.60|
|Nifty 50 TRI returns (CAGR)||24.02||19.37||15.43||13.54|
Date of First Installment: April 01, 2008 & Scheme Inception Date: March 06, 2008. Past Performance may or may not be sustained in future
|Particulars*||1 Year CAGR (%)||3 years CAGR (%)||5 years CAGR (%)||Since Inception (29-Dec-09) CAGR (%)|
|Axis Long Term Equity Fund-Growth||21.11%||14.68%||26.96%||19.35%|
*As on 31st August 2018
On the similar lines, Axis Long Term Equity Fund-Regular Plan growth has delivered CAGR returns of 19.35% since inception as on 31st August 2018.
Note: Above schemes are for illustration only and not a recommendation. Please consult your financial advisor before taking any investment decision.
To conclude, investors must consider ELSS funds as part of their equity mutual fund portfolio and continue for the long haul. This category of mutual funds are of great significance as at some point of time you will have to zero in on your tax saving investments. If you compare further, these closed-ended schemes have performed way better than many open-ended schemes. Just because funds are close-ended, shouldn’t restrict you from investing in them. Enjoy the wealth creation and keep investing systematically per month via SIP to reap rich dividends in years to come.
Disclaimer: The author has investments in Equity Linked Savings Schemes. The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions