Exiting ELSS Funds: When and How to Make the Right Decision
Investing in Equity Linked Savings Scheme (ELSS) is a common approach for both tax-saving and growth-oriented investors in India. However, with volatile market conditions, many investors might question whether it is wise to exit early or hold on to these funds. This article aims to guide you through the decision-making process, addressing key points to consider before exiting an ELSS fund.
Understanding ELSS Funds
ELSS funds are domicile tax-saving schemes accessible through Mutual Funds (MFs) in India. They are equity-oriented, meaning their primary investment is in stocks, which typically requires a time horizon of at least 5 years for optimal returns. Over this period, ELSS funds can potentially double your investment, especially if the purchase was made during market downturns.
Time and Patience
The core principle to remember is that time is a critical factor in achieving double-digit returns. Investing for a minimum period of 5 years is advisable, as it allows the fund managers to make strategic investment decisions and benefit from long-term market growth.
Matching Aggressiveness
The aggressiveness of the ELSS fund will also influence the time required to generate returns. More conservative ELSS funds may take longer to show positive results, while more aggressive funds might provide returns faster but come with higher volatility.
Comparison with Other Investments
When comparing ELSS funds with other long-term tax-saving instruments such as Public Provident Fund (PPF) or National Savings Certificates (NSC), it's important to consider the absolute returns and their compounding effect over time. While PPF and NSC offer lower risk and assured returns, the growth potential of ELSS funds can be significantly higher, making them a more attractive option for long-term investors.
Realistic Returns and Market Dynamics
It is crucial not to base your decision on short-term performance during market volatility. Stick to your investment horizon and consider the fund's track record over 3-5 years. The most significant returns in ELSS are typically realized over the long-term, and reacting to short-term fluctuations can lead to suboptimal investment outcomes.
Locked-in Period and Continuous Investment
ELSS funds have a mandatory lock-in period of 3 years. This means that you cannot exit your investment before this period ends. However, contributing new funds to the same ELSS during the locked period might not be advisable as the lock-in period needs to be strictly adhered to. If you wish to change funds, it would be wise to choose a more aggressive ELSS fund to take advantage of future opportunities.
Maintaining Patience and Strategic Reinvestment
If you are in a dilemma about exiting early, consider keeping your investment and adjusting to a more aggressive ELSS fund after the initial 3-year period. This strategy allows you to take advantage of market corrections and buy more units at reduced prices, enhancing your overall returns.
Conclusion
In conclusion, exiting ELSS funds prematurely is generally not advisable, especially given the current volatile market conditions. Patience and a long-term perspective are key to maximizing the returns on your investment. If you believe the market is not optimal for your investment goals, wait out the lock-in period and then consider reinvesting in a more aggressive ELSS fund. This approach can help you navigate the ups and downs of the market while achieving your long-term financial objectives.