Equity-linked savings schemes come with the major advantage of tax saving. However, they also help investors earn high returns by exposing themselves to a greater degree of risk. The question, however, remains – if a particular ELSS fund is not performing well in the short term, should you quit it, and switch to another fund? Read on to know the answer.
What is an ELSS fund, and how to invest in them?
Here is a brief review of what ELSS funds are and their key features. ELSS funds help investors generate wealth and save taxes. They invest a majority of their corpus in equity or equity-linked investments. These funds are also called ‘tax-saving mutual funds’ since they offer investors a tax exemption of up to ₹1,50,000 annually. The income that you invest in an ELSS fund, at the end of a three-year period, will be considered as ‘long-term capital gains’ (LTCG) and you will be charged a LTCG tax of 10% if the income goes beyond ₹ 1,00,000.
Key features and benefits of ELSS funds:
You should prefer ELSS funds for the following reasons –
- ELSS funds invest a minimum of 80% of their investible corpus in equity or equity-linked instruments.
- They diversify across different market capitalisations, themes, and sectors, thereby helping you minimise risk.
- You can benefit from a tax exemption on the invested amount under Section 80C of the Income Tax Act.
- You can start investing in these funds with a minimum amount of ₹500 monthly.
Should you switch your ELSS funds in 2024? A case study –
Say you invest in an ELSS fund, gain tax benefits and see your wealth grow steadily, only to see a sudden drop in profits due to a short-term market downturn. Should you switch from the ELSS fund to another fund in such a case? A report published in 2019 tracks the ELSS fund investment journey of a 43-year-old mutual fund investor who started his journey with ₹500 in October 2005. His growing returns plummeted during the 2008 financial crisis that shocked the world. However, instead of stopping his ELSS investments, he continued investing systematically, month on month. The result was that in 2019, the individual had a percentage return more than the average inflation in the previous 10-15 years[rlink]. Consistently investing in an ELSS fund can help you save taxes and consistently grow your wealth. However, for this to happen, you must consistently invest in the fund. Therefore, switching your ELSS funds in 2024, despite the rising inflation is not a good idea.
ELSS mutual funds help investors save tax and grow their income significantly in the long term. However, if owing to market volatility, your ELSS fund is not doing well in the short term, you must avoid stopping your SIP investments or switching to another fund only for this reason. You can grow your wealth only by being consistent with the SIP contributions towards an ELSS fund.