ELSS (equity-linked savings scheme) is a popular mutual fund that not just offers tax benefits as per Section 80 C but also provides the potential to generate wealth over the long term. Such funds majorly invest in equities and equity-linked instruments, which means their returns are associated with stock market performance.
During bearish market conditions when stock prices decline, new retail investors often question whether it is the right time to continue investing in ELSS. However, there are several merits to consider that make investing in ELSS during falling markets a favourable option. Discussed here are such crucial merits that you must be aware of.
Capitalising on lower valuations
During falling markets, stock prices tend to decline, often resulting in attractive valuations for quality stocks held by ELSS funds. By investing in ELSS during these periods, you can benefit by purchasing stocks at discounted prices, potentially increasing the upside potential when the markets recover.
Consider a scenario where a new investor, suppose X, decides to invest in an ELSS fund scheme during a market downturn. Here, he will purchase units of the fund at a lower net asset value (NAV) due to the market decline. When the market eventually recovers, he would gain higher returns as the NAV of the fund increases, resulting in capital appreciation.
Potential for higher returns
Historically, equity investments have demonstrated the potential for higher long-term returns compared to other asset classes. By investing in ELSS during falling markets, you can position to capitalise on market recovery and potentially achieve higher returns over the long-term investment horizon.
Let’s say Y starts investing in an ELSS fund scheme when the markets are experiencing a downturn. As the markets gradually rebound, Y’s investment would benefit from an upward trajectory, leading to significant wealth creation over the long run.
Tax benefits
ELSS offers tax benefits under Section 80 C, making it an attractive investment option to save tax. By investing in the ELSS scheme during falling markets, you can avail tax benefits while potentially enjoying capital appreciation over the long run.
For instance, consider W, a retail investor who invests in the ELSS scheme during market downturn and holds the investment for three years. By doing so, he not just gets the benefit of capital appreciation but even enjoys a tax deduction of up to Rs 1.50 lakh on his taxable income.
Systematic investment approach
Investing in ELSS through a systematic investment plan (SIP) during falling markets is a prudent strategy. With SIP route, you can invest a specific investible periodically irrespective of the market movement. By contributing systematically in ELSS through SIP route, you gain the benefit of cost averaging. As per this concept, higher units are bought during falling prices and lower units are bought during rising market conditions.
For example, suppose V starts an SIP in an ELSS fund during a market downturn. He invests a periodic amount every month. As the markets fluctuate, he automatically purchases more units at lower prices. This disciplined approach helps in mitigating the impact of short-term market volatility and potentially generates better returns over the long-term owing to the rupee cost averaging feature.
Long-term wealth creation
ELSS is an equity-oriented investment option with a lock-in period of just three years. By investing in ELSS during falling markets and adopting a long-term perspective, you can create wealth over time. Equity investments have historically outperformed other asset classes owing to their association with equities, and by staying invested in ELSS, you can potentially benefit from market recoveries and compound your wealth.
For instance, U is a new investor who invests in an ELSS fund during a market downturn and remains invested for a significant period i.e., 10 years or more. Here, as the markets recover and grow, U’s market investment would appreciate, contributing to long-term wealth creation.
Final words
Investing in ELSS during falling markets is a strategic move to buy quality units at lower cost, which you can later redeem at a gain when the market rebounds. Besides allowing you to capitalise on a lower valuation, ELSS also allows you to avail tax benefits as per Section 80 C.
