Mutual fund schemes for tax benefit help not only in reducing one’s tax liability but also in growing savings over the long term. Such mutual fund schemes are called ELSS – Equity Linked Savings Schemes – and as the name suggests, your savings are invested in equity markets. For the financial year 2020-21, if you are looking to save tax by investing in ELSS, there are several such tax-saving MFs to choose from. However, there cannot be a single scheme that can be called the best MF scheme as the returns are not guaranteed and may change over time.
As of today, the stock market appears to be precariously poised. While the index levels are almost back to pre-COVID levels, the economic conditions don’t look much promising at least in the near future. But, that is exactly the situation that long term investors in equities need to ignore. “Hesitating from investing in mutual funds because the market is low at the moment is the wrong way of looking at investments. It’s always the right time to invest – only those trying to get rich quick worry about such short term market changes,” says Satyen Kothari, Founder & CEO, Cube Wealth.
ELSS investors have the savings locked-in for 3 years. Even if the returns are low because the market has turned turtle after the lock-in has ended, the investors may continue without exiting. As and when the market rises and NAV of schemes increases, the exit may be planned. “If you are investing in ELSS Funds, you should not be worried about the past or current state of the market and think about the future instead. Not only are you getting an upfront benefit in the form of tax savings, but you are also likely to earn healthy returns if you stay invested for the long term as well,” says Kothari.
Incidentally, the average 3-year ELSS category return is around 1.03 per cent and it will be better if the investors continue without exiting at these lower levels. The 10-year category average is around 9.27 per cent for the ELSS category.
If you are a new investor and wants to know how to invest in ELSS, here are a few ways. One can invest in ELSS directly from the fund house or through mutual fund distributors. But, choosing the right ELSS is equally important. Here is what Kothari has to suggest – “Don’t decide on your own. Most investors are not equipped to pick their own mutual funds. It is best to consult a wealth coach or talk to an expert advisor with a proven track record of beating the markets. Looking at star-ratings and historical data alone is not enough to pick quality mutual funds. Past success does not guarantee future success. There are financial experts who do this for a living, they dedicate all their time to find the right options – I’d suggest you leave the picking to them.”