Investment

4.82% in 5 years; does it make sense to invest in ELSS funds to save taxes?

Some taxpayers are questioning the wisdom behind investing in ELSS mutual funds to save taxes under Section 80C in this financial year. Citing the single-digit returns offered by the tax saving mutual fund category in five- and 10-year periods, these investors have been asking around whether these funds are worth the extra risk. After all, one takes extra risk to fetch extra returns, they reason.

To be sure, the ELSS or tax saving/planning mutual fund category has given abysmal returns recently. The category has offered 0.86% in the last one year, and 0.43% in three years. It has offered 4.82% returns in five years, and the 10-year return is only 9.26%, according to Value Research, a mutual fund tracking firm. A five-year tax-saving fixed deposit with a bank with very little risk offers more returns than ELSS funds, say these taxpayers.

As you know, equity mutual funds have been struggling to prove their worth in the last two years. Even though the key market indices were scaling new highs, giving the illusion of a bull market, very few stocks have participated in the rally. Inventors were chasing only a few heavyweight index stocks and only a few schemes that owned these stocks rewarded investors during this period. Most value-conscious investors, including fund managers, have been playing it safe for a while and they failed to benefit from the rally.

Coming to the current scenario, it is true that we are facing a challenging period. Indian economy was already under pressure when the Covid-19 pandemic hit the world and disrupted the entire global economy. It remains to be seen when and how the market would recover. Market pundits uses a lot of ifs and buts while forecasting, as a lot of factors like vaccine for the virus, containing the pandemic, opening of businesses, and so on, still face a lot of questions.

Also, it remains to be seen how the Indian economy recovers from the current disruptions caused by the pandemic. Many analysts are hopeful of that the pent-up demand would propel the economy and market upwards, that alone will not be able to sustain the rally.

All these factors put a big question mark on the likely returns you would earn from your equity investments, including ELSS funds. However, to draw quick conclusions based on the current uncertainties and deserting the stock market may not be a wise decision for many reasons.

One, are you betting against an economic revival? Well, if so, its impact would not be limited to only your equity investments. Your entire financial life – be it your job, income, personal finance… – would be adversely impacted by it. Also, when governments across the globe and central bankers are doing everything possible to revive the economy, it would be foolish to bet against it.

Sure, how the market might behave over a long period is a big question, but the economy sure will show signs of recovery soon. One the governments get a better control of the virus infections and especially after successful vaccine hits the market, there would be sure signs of economic recovery. The market may run ahead of these actual events as it always does. So, it may not be a wise decision to abandon equity at this juncture.

To sum up, you can still choose equity to achieve your long-term financial goals. However, you should proceed very cautiously because of the uncertainties all around. Always choose a mutual fund that matches your investment objective and risk profile. Similarly, have a longer investment horizon while investing in equity schemes.

Best ELSS funds to invest in 2020

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