The power of combining tax benefits alongside long-term wealth creation is surely a compelling investment option for many. And Equity-Linked Savings Schemes (ELSS) are a type of equity mutual fund to provide such an opportunity.
Also known as tax-saving mutual funds, ELSS funds qualify for a tax deduction of up to Rs 1.5 lakh under the provisions of section 80C of the Income Tax Act, 1961. Also, since it is primarily invested in equity and has a mandatory three-year lock-in period, it provides the potential to deliver inflation-beating returns over the long term.
But what should be done after the maturity period? Should you recycle your ELSS and reinvest to reap more tax benefits or find other alternatives? Here is a detailed look at when it’s best to recycle or sell and reinvest your ELSS.
Recycling ELSS funds
By recycling your ELSS fund, you take out the money from the fund and reinvest it. For example, most investors typically make an investment of Rs 1.5 lakh annually in ELSS for an ongoing period of three years. And after three years when their first ELSS investment comes out of the mandatory lock-in period, they will re-invest their investment in ELSS and seek the tax benefits under section 80C. This helps to enjoy the tax break that comes with ELSS investments without making additional investments.
According to most experts, ELSS can be a viable solution for meeting tax-saving needs, with an added potential for long-term wealth creation. However, a lock-in period of three years does not guarantee that you can always make a profit when the time comes to sell. On the contrary, there may be times when you may be facing losses due to uncertain markets or other unfavourable factors. It would therefore be unwise to rely on this as part of an overall tax planning strategy, as selling at a loss would only further hamper financial goals.
An ELSS fund can significantly contribute to long-term wealth creation if given enough time to perform. This is because ELSS mutual funds invest in equity funds and equity-related instruments. Equity can be volatile in the short term, but over time it has the potential to deliver decent returns as the market has the chance to stabilise itself.
Reinvesting your ELSS funds in other funds
Upon completing the lock-in period of an ELSS investment, you may also reinvest the funds into other mutual funds investment plans. Depending on your approach and desired level of control, this could be an index fund or an actively managed fund. But before making a decision, compare factors such as the fund’s track record, expense ratio, portfolio allocation, and other details to ensure you select one that fills all your needs in terms of returns and risk tolerance. This can help you create an effective and successful investment strategy going forward.
So, what should you do after ELSS’s three-year maturity?
After three years, unless there is an urgent financial requirement or a financial crisis, it is best to choose to let your investment be. Most experts believe that ELSS investments should be viewed as a long-term strategy for wealth building. These funds have the potential to provide substantial inflation-beating returns if held for a long term (at least 5-7 years or more). Therefore, investing in the best ELSS funds can help you achieve your financial goals, and the tax deduction should be considered an added benefit rather than the primary reason for investing in this particular fund.
When faced with this situation, it can be beneficial to consult an experienced financial advisor who can assess your investment objectives and current financial situation before providing personalised advice.
