When not to invest in Equity Linked Saving Schemes (ELSS)

Equity Linked Saving Schemes popularly known as ELSS funds are still struggling in the Indian market to establish themselves. Many investors, who are afraid of the equity market, choose life insurance or Provident fund to save tax.  These products are few decades old and are very popular among Taxpayers. However, due to increase in the inflation and lower returns, these products are losing their market share. Investors are now looking for those products which offer growth in the long term and helps in wealth creation. ELSS is one such product which offers both, but due to the risk/Volatility associated with the product, people hesitate to invest in it.

I am firm believer that “confusion is the first stage of solution” –

so let me try to confuse you through this post 🙂 

ELSS long term performance

Chart – ELSS performance – 23 times or 2300% in 20 years

Few question before investing in ELSS

For a longer duration, any product which generates returns over and above inflation is good for investor and in the category of tax saving instruments, ELSS funds are best in the lot till date. But are these funds always good for an investor? Does this fund suits every category of investor? Are these funds successful in generating good returns in the short term? Have you ever thought about these questions while investing or just invested because you need to save tax? Let us today try to focus on above questions and find out which category of investors should avoid these funds and also in which situation one should stay away from ELSS funds.

volatality in elss funds

ELSS 1 Year performance – rolling return

Rolling returns display returns in overlapping cycles of any specific frequency – going back as far as the data we have available. The goal is to show you the frequency and magnitude of an investment’s good and bad performance periods.

Must Read – Best Tax Saving Option ELSS Vs PPF

Think Before you invest in ELSS funds

Post Retirement

All those investors who are senior citizens or retired and are looking for the investment schemes should try and avoid ELSS funds as tax saving tool. Post retirement is a phase where one should look out for those schemes which offer both liquidity and tax saving with fixed returns. ELSS fund comes with 3 years of lock in and is highly risky if you don’t understand volatility. Also, as there is no guarantee on returns, there are often chances that investor may lose the part of its capital. [we suggest even in retirement people would have decent exposure to open-ended diversified equity mutual funds based on risk profile & requirement – but after understanding risk associated with that]

ELSS rolling return

ELSS 3 Year performance – rolling return

Investor’s Risk profile is conservative

If an investor’s risk profile is moderately conservative then he/she should not invest in ELSS funds, as these are highly volatile and does not guarantee returns. The conservative investor always looks for growth with security and a slight decline in portfolio makes them worried. So, they should look at other tax saving products which are less volatile and should ignore ELSS funds. [we may also suggest that if you are conservative investor & literally hate equity & volatility – this year add some amount in ELSS]

Tax Saving Funds Performance

Rs 100 invested in Jan 2008

Investment horizon is less than 5 years

If an investor has a goal which is of less than 5 years then he/she should ignore ELSS funds as a part of equity investments. These funds have a multi-cap portfolio which invest aggressively into small and mid-cap and thus bears high risk. Ideally for a period of 5 years for equity one should only consider large cap fund which are less volatile than ELSS funds. [saying 5 years for equity funds doesn’t mean that it will not be negative if you hold for 5 years]

5 year rolling return elss

ELSS 5 Year performance – rolling return

Investing at the end of Financial Year

Most of the time people look for tax saving products only during last quarter of the financial year. It is the time when they (Employees) are forced to submit their investment details and thus in a hurry they invest in ELSS in lumpsum. Ideally, this is the wrong way to invest in ELSS. One should always plan their tax related investment in advance and invest through SIP mode in ELSS to get the benefit of rupee cost averaging. [it’s not about performance but discipline]

SIP in ELSS Funds

Saving Frequency: Monthly ●  SIP Amount: 1000.00

Total Investment: Rs 2.41 Lakh ●  Current Value: Rs 17.7 Lakh

What should you do?

To conclude, investors should avoid ELSS funds if they are looking for short term and are not comfortable with equities. However, one should also keep in mind that ELSS funds are not at all bad. In fact, ELSS is the best tax saving option available in India but only for those who are looking for long term and have the capacity to digest volatility. And for rest National Saving Certificates or Tax-free FD or PPF would be better as these are less risky (without considering inflation) and offer fixed interest. [if your income is less must invest some portion in ELSS for tax saving]

Let me share not a single client of our’s use ELSS for tax saving – in most of the cases 80 C is exhausted in EPF, home loan & term insurance premium. So, how do you invest in ELSS funds? Do you agree with the above points or have some other views? And if you are confused – add that in the comment section.

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{ 18 comments… add one }
  • Indranil De Sarkar March 17, 2016, 1:50 PM

    How to become your client

  • Japesh Thakur March 17, 2016, 3:42 PM

    As usual a well researched and thought provoking article. I have only one issue. It is absolutely poor advice to do a SIP in ELSS funds. Each installment gets locked in for three years and hence it makes no sense. I have always used the lumpsum route and believe me the results have been outstanding.

    • Hemant Beniwal March 18, 2016, 9:53 AM

      That’s true Japesh but when we talk about equity we are talking about 5-10 or life-long investments. Lockin should not be an issue & if it is even any lumpsum that you invest on any date will be locked for 3 years.

  • rajnikant gajjar March 17, 2016, 4:31 PM

    We the indians are genetically wired with HERD MENTALITY.We must think individually for every decision in our life rather than going for COPY PASTE approach.ELSS is not the right investment all the times.

    • Hemant Beniwal March 18, 2016, 9:54 AM

      Agree Rajnikanth & this is not limited to ELSS. One should look at his requirement & then consider any investment.

  • shrikant March 17, 2016, 4:42 PM

    I am retd person. Last 3 years I am fully utilising 1.5 lacs limit in investing ELSS e.g HDFC long term equity fund under direct dividend payout. In fact 1999-2000 onwards I subscribe to sundarm Elss where I had recd hefty dividends.However in 2006-07 when I smelled Lehman collapse/sub prime issue in advance I withdraw the same & kept in another folio. It is not bad to invest Elss. Only u have to keep track-ultimately it’s your hard earned money. For this exercise u r the ONLY person who can keep the watch on your investment & nobody else.

    • Hemant Beniwal March 18, 2016, 9:57 AM

      Hi Shrikant,
      You were lucky to withdraw in 2006-07 – good to hear about your conviction in equities.

  • Dr MCS March 18, 2016, 9:16 AM

    I invest in PPF & ELSS ( 1.5lacs each) before 5th of April every year in lumpsum. I use ELSS as a Savings for LongTem Growth ..though Iam a Senior Citizen.

    • Hemant Beniwal March 18, 2016, 9:51 AM

      Great Dr MCS that you understand role of equity in long-term growth, please try to share your experience with young doctors who have no clue about this.

  • Pradeep March 19, 2016, 1:21 PM

    Thanks for the article on ELSS. There is another BIG (yes, really BIG) reason why a person invests in ELSS schemes. Of the 100’s of MF’schemes many schemes require one time investment of Rs.5000.00 followed by SIP of Rs.1000.00. Possibly ELSS schemes are the only ones which allow SIP with Rs.500.00 (Rupees Five hundred) without any First time lump sum investment. The Great Indian Middle class, sure will choose this route, for investing in MF’s at the minimum cost, though may not be for tax savings. Rs.500.00 seems small just like RD for them.

  • Anil Kumar Kapila March 19, 2016, 4:39 PM

    Hi Hemant
    I am surprised to know that many senior citizens are investing in ELSS. I agree 100% with the points mentioned by you. I do not invest in ELSS. Personally I feel that most senior citizens have some health issues and it is difficult to predict how long they are going to live. If a senior citizen is healthy and is living an active life then he can perhaps consider investing in ELSS but if he has some health issues then he should stay away from ELSS.

    • Dr MCS March 19, 2016, 5:24 PM

      Senior Citizenship starts from 60 & not every one is going to die at 60. I propose to die at around 85 God Willing ! I have a clear cut agenda to invest in ELSS & Equity Funds & I also actively trade in Equities & have been fairly successful in multiplying my assets. I will have Equities predominantly in my portfolio for some time to come. With falling interest rates, if Seniors bank on Debt instruments, they are doomed. Yes, one has to be cautious not give into gambling instinct. BTW no body can predict how long one is going to live. Even youngsters are dying everyday

  • G K Barnwal March 19, 2016, 8:40 PM

    I’m a government employee, started investing in ICICI Tax saver fund as lump sum in 2010 & got good return. Started sip in Reliance tax plan growth for Rs. 2000 in 2014. I think SIP is better to average the volatility of the equity markets. And if you have a 5 to 10 years or more time frame, then it becomes best tax saving cum investment option. Hemant sir, thanks for your good article.

  • fergi May 17, 2016, 4:55 PM

    Hi Hemant,

    If we have stayed in ELSS for more then 6 years say HDFC TAX saver.Now looking to switch to other MF fund as current HDFC fund has given 9% returns only in 6 years. How to switch because on redeem I will get lump sum amount and I want to reinvest through SIP. In this case its like starting from scratch again to feel the power of compounding.If invested through lump sum,then risk comes ? please suggest

    • Sanjay Sinha December 13, 2016, 12:30 PM

      Dear Fergi,

      It is not possible to invest in other fund house without redeeming.

  • Prasad January 10, 2017, 1:07 PM

    Thank you for the insight on ELSS. I have a doubt that only two mutual funds are allowed to invest under ELSS or can we invest on more funds for tax savings??? Please help me on this.

    With regards

  • prasanna February 14, 2017, 10:52 AM

    I am 26 year old professional,i want to invest 10,000 per month through SIP in ELSS.
    Could you please suggest some ELSS where i should invest.
    I am expecting good returns and ready to bear risk. i want to invest for long term say 5-10 yrs.

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