I have been investing in tax saving mutual funds or ELSS since 2015 and I would like to share the top three lessons I learnt by investing in them.
These are practical lessons that I learnt only from actually investing rather than just talking about them with experts or by reading about them. If you are considering investing in tax saving mutual funds, these lessons and experiences might be something you want to consider.
I have written about some of them earlier when I was relatively new to these funds but my four years with this category of funds have been quite useful in understanding equity mutual funds and how does it feel to be an equity investor.
Here are the experiences or lesson:
1. It’s actually convenient
A PAN card, a bank account, some form filling and I was all set. The best thing is that it is actually a one-time activity. Once your KYC is done, investing in the ELSS fund of your choice is fairly simple in terms of execution. Since I was investing with Scripbox, the process was further simplified.
All these four years, I just had to set up a SIP or invest when I had the money to do so.
2. This is the most effective way to start investing in equity and understand the “experience” of it
ELSS tax saving funds were my first step towards building an equity portfolio. Most ELSS funds are essentially long term oriented multi-cap funds. This means they invest in a wide array of companies across market capitalizations keeping in mind the long-term growth of companies.
The lock-in period meant that I was detached from short term market fluctuations ironically, because I couldn’t do anything about them. In these four years, I saw the BSE Sensex do its seemingly erratic climb from 28,000 to 40,000.
There were great ups and downs during this period (in 2018, when I saw the Sensex lose almost 4000 points in the space of a few months!) and I often saw my ELSS portfolio in the red.
During the initial months I have seen negative returns which did make me nervous for while. This, despite the fact that I understood the nature of the asset class and how stock prices grow over time.
The best thing though was that the lock in helped me tide over the market ups and downs along with the emotional ups and downs.
The lock-in period meant that I was detached from short term market fluctuations ironically, because I couldn’t do anything about them. In that period, I saw the BSE Sensex do its seemingly erratic climb from 28,000 to 40,000 in these four years.
My ELSS portfolio shows a growth rate that is comfortably above the prevailing inflation rate as well as what I would have seen with traditional fixed income tax saving options.
My idea of long term is 7 years or more (preferably a decade at least) and it’s just been four years for my ELSS investments. I am actually glad for the lock-in that enforces long term thinking and more importantly, behaviour.
Even if one is well aware of the nature of equity, enforcing that understanding in terms of behaviour is easier said than done. ELSS tax saving funds, to that extent, are actually a good way for the new equity investor to learn how the asset class behaves.
The fact that you should invest at most Rs 1.5 Lakhs (normally lesser, as for most of us EPF also gets deducted which also counts towards Sec. 80 C deductions), means that for those without much capital to invest in the initial days this is a great way to start with equity. There is no limit, however, on how much you can invest in tax saving funds.
ELSS funds have provided me with a no-excuse and strict way to invest in equity and form an effective first step towards building my long-term investments. For those who are starting early, think of ELSS beyond tax saving. They can be the “secret weapon” in your equity investing arsenal to hit your long-term goals.
There is still time to save taxes smartly. Watch this video to find out how.