One of the benefits of investing in Equity Linked Savings Scheme (ELSS) to save taxes is it’s considerably lower lock-in period. ELSS mutual funds come with 3 year lock-in period. It is a high return tax saver mutual fund, which helps you save up to Rs.1.5 Lakh, as per deduction under section 80C.
So, how can the low lock-in period of ELSS funds benefit you? In other tax saving instruments, you can only redeem your investments after a considerable period. In ELSS, you can withdraw your investment post-maturity.
Here is an example that can explain how it works:
Suppose you invested Rs.12,500, through a monthly ELSS SIP (Systematic Investment Plan), for a period of 12 months, starting April 2019. Your investment for the month of April 2019 will mature after a 3-year lock-in, in April 2022. Similarly, all your SIP investments will grow, as and when they complete their individual lock-in periods. Even in case of a lump sum investment, each investment will mature after the completion of its lock-in period.
This brings us to the next question, what can you do to get maximum returns after the investment has matured? You can reinvest your ELSS investment after it completes its tenure.
What is re-investment?
Here, you invest the matured investment in the same scheme, instead of injecting fresh funds. Going forward from the above example, let’s suppose your Financial Year (FY) 2019 investments will mature in April 2023. You can use the same funds to invest the matured amount of Rs.1.5 lakh in the same scheme.
Can you tax benefits by re-investing?
You can receive tax benefits by reinvesting the matured amount in the same scheme. Referring to the above example, if you wish to claim tax benefits in 2023, but you are falling short of funds to invest in ELSS, you can get tax benefits by re-investing your matured 2019 investments. However, you may want to be careful not to hinder the long-term growth of your fund.
Is it advisable to reinvest your ELSS funds every 3 years?
Reinvesting your matured ELSS fund after every 3 years may not be good for the long-term growth of your portfolio. Here’s how:
- ELSS are equity-based high-risk, high-return mutual funds. Stock markets witness volatility. Therefore, markets may not be favourable during the period you wish to recycle your investments.
- If the markets are sloping downwards, you may experience loss during this process. Similarly, if the markets are moving upwards, your asset sale might disturb the overall growth momentum of your portfolio. Therefore, it is beneficial to stay invested for the long
- This strategy involves volatility risk. Markets witness short-term volatility. You may either gain or lose while recycling your investments. However, in the long-run, markets march forward. Therefore, risk averse investors may usually not reinvest their ELSS investments.
- For instance, you would have integrated your medium-term and long-term goals with your tax-saving goals. Recycling your investments could hinder the growth of your investments. If you do not make any new investments, the benefits of cost averaging could get wiped out. Also, your integrated goals could fall short of adequate funds. Hence, your ELSS investment boils down to only being your tax-saving investment, failing to fulfil other purposes.
Therefore, reinvesting in your ELSS fund, after every 3 years may not give you the desired returns on your investment. It may not allow you to fulfil additional goals, from your tax saving investments. This is why risk-averse investors invest in mutual funds, with the goal of reinvesting them, at the risk of their portfolio growth and integrated goals.
It can help if investors focus on the pros and cons of individual investments before opting for a reinvestment. However, it can be beneficial to stay invested for the long term and continue with fresh SIP/lump sum investments.
