Equity Linked Savings Funds (ELSS) have long been hailed as a strategic investment avenue for tax-saving purposes, with a lock-in period of three years. However, many investors tend to withdraw their funds immediately after this lock-in period expires, assuming that their journey with ELSS ends there.
In this article, we’ll explore why there is no point in withdrawing funds from an ELSS after the 3-year lock-in and how continuing your investment can reap significant benefits.
Understanding ELSS as Equity Funds
It’s crucial to recognize that ELSS funds are essentially equity funds. This means that they primarily invest in stocks and equities, aiming for long-term capital appreciation. Contrary to some misconceptions, the end of the lock-in period does not imply that the journey with ELSS should come to an end.
We must always focus on what is the investment objective of the fund and not just on its name.
Why this misconception happens?
- Firstly, when we invest in tax saver funds, our investment objective shifts from capital appreciation to tax advantage. When our objective of tax advantage is achieved, then we start to wait for 3 years to pass, so that we may withdraw our funds. We forget that this is also an equity fund which has capability to provide capital appreciation in the long term.
- Secondly, since investors get tax benefit in ELSS funds, so they think that there must be some drawback in these funds as “There is no free lunch”. Though this philosophy applies here too, but the price which investors pay is not in terms of ‘lesser returns’ but in terms of ‘3 years lock-in’.
Why Stay Invested Beyond 3 Years?
Tax Efficiency Continues
If you continue to hold your investments in ELSS funds and don’t withdraw it unnecessarily, then you may compound your investment with time without paying any capital gain tax.
Equity Returns Unleashed
The very nature of ELSS as an equity fund implies the potential for high returns. By staying invested, investors can harness the power of compounding and ride the wave of market fluctuations for potentially higher gains.
Low Churn and Better Returns
ELSS funds typically have lower portfolio turnover compared to regular equity funds. By maintaining investment post the lock-in period, investors avoid unnecessary churn, which could impact returns negatively.
Large Cap Orientation of ELSS Funds
A closer look at the portfolios of many ELSS funds in India reveals a distinct tilt towards large-cap stocks. Large-cap stocks are known for their stability and resilience, making them a prudent choice for long-term investors. This orientation ensures a more stable and consistent performance over the years.
How they fare against Large cap & Flexi cap Category?
While ELSS funds have a large-cap orientation, it’s valuable to compare their performance with the broader Flexicap category, which includes funds with varying allocations across large, mid, and small-cap stocks. ELSS funds have demonstrated competitive returns, often outperforming or aligning closely with Large cap & Flexi cap funds.
| Category Name | 1 Week % | 1 Month % | 3 Months % | 6 Months % | YTD % | 1 Year % | 3 Years % | 5 Years % | 10 Years % |
| ELSS | 1.57 | 8.71 | 7.95 | 18.37 | 25.49 | 21.41 | 20.16 | 16.37 | 16.6 |
| Flexi Cap | 1.59 | 8.41 | 7.98 | 18.56 | 25.82 | 21.8 | 19.59 | 16.4 | 16.6 |
| Large Cap | 1.54 | 8.82 | 6.76 | 15.6 | 21.18 | 17.46 | 16.95 | 14.72 | 14.39 |
The table clearly shows that ELSS & Flexi cap funds have similar returns & ELSS funds are clearly outperforming large cap funds in most of the time frames.
Conclusion
In conclusion, the expiry of the 3-year lock-in period should not signal the end of your journey with ELSS. The decision to stay invested in ELSS beyond the 3-year lock-in period is not only sensible for tax benefits but also for the potential equity returns it can provide. The comparison with flexicap funds highlights the robust performance of ELSS, emphasizing their large-cap orientation for stability and growth.
As with any investment decision, it’s essential to align your strategy with your financial goals and risk tolerance, but for those seeking tax efficiency and long-term capital appreciation, continuing with ELSS can be a wise move.
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