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ELSS and Market Volatility: How to Navigate Market Fluctuations with ELSS

Published: June 26, 2023
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In recent times, financial markets have been facing extreme volatility owing to major macroeconomic factors, which, in turn, have led to a hike in oil prices and interest rates. To steer clear of the high volatility associated with the stock market, many individuals have been looking for alternative investment options, which can aid in reducing portfolio risks.

In this regard, an Equity Linked Saving Scheme (ELSS) can be an excellent choice. In 2022, the ELSS mutual fund category in India witnessed active investments worth Rs. 6,932.21 crores between January and October. In terms of returns, this category has been consistently offering 17% 3-year returns and 11% 5-year returns.

So, what are ELSS funds

ELSS is a type of mutual fund whose pooled funds are primarily invested in equity-related instruments. The portfolio is actively managed by a fund manager whose goal is to ensure risk-adjusted returns for the fund’s investors.

Now, it needs to be kept in mind that risk associated with market volatility can occur due to several micro and macroeconomic factors. It may occur due to fluctuations in demand and supply, fiscal policy changes, inflation, unemployment, and more. Under such circumstances, investing in ELSS funds can be one of the best ways to navigate market volatility.

Wondering how Check out the benefits that one can get by investing in these funds.

How can ELSS funds help navigate market volatility

Here is how ELSS funds can help deal with both short-term and long-term market fluctuations:

Facilitates a lock-in period

Unlike other mutual funds that offer high liquidity, ELSS mutual funds come with a 3-year lock-in period. This is applicable from the date of investment, and during this time, there is no provision for a premature exit. This feature prevents investors from panic selling during times of volatility and also helps maintain the stability of the fund’s unit prices.

It is to be noted that ELSS funds have the shortest lock-in period in comparison to other financial instruments like tax-saving FD (5 years) and PPF (15 years).

Helps investors to save on taxes

By investing in ELSS funds, individuals can avail of income tax deductions of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961. This applies to the invested amount within a financial year. During times of market fluctuations, the return on investment for any kind of asset becomes unpredictable. But, making a tax-saving investment under such circumstances can provide dual benefits of wealth generation as well as savings.

Provides a long-term investment horizon

To invest in ELSS funds, investors need to have an investment horizon of more than 3 years. This is because the performance of such schemes depends on the price movements of the underlying equity assets.

Staying invested in an ELSS fund for the specified lock-in period of 3 years or more helps to balance out the profits and losses incurred by the various assets in the fund’s portfolio. This ensures stable returns to investors despite short and medium-term market fluctuations.

Additionally, as ELSS mutual funds primarily deal with equity assets, their chances of generating higher returns are more than other tax-saving instruments.

Enables investors to earn stable returns

A significant benefit of investing in ELSS funds via SIP is that investors can take full advantage of rupee cost averaging. With SIP, investors can deal with high market volatility efficiently as the cost of investment gets averaged out in the long term.

With ELSS funds, investors must stay invested for the specified lock-in period. If they opt for a Systematic Investment Plan and invest a fixed amount of money at regular intervals, they can get additional fund units with the same amount of investment during bearish markets.

Use the Bajaj Finance SIP Return Calculator to get an idea of the returns on your mutual fund investment.

In simpler words, when the market collapses, investors will receive a higher number of units; with markets rising, the return on investment gets averaged out across a long tenure irrespective of market fluctuations. This system helps fund managers generate stable returns for their investors in the long run.

Taxation of ELSS mutual funds

Investing in an ELSS scheme can provide great taxation benefits. As investors cannot redeem their units before the end of their 3-year lock-in period, the capital gain from this scheme automatically comes under Long Term Capital Gains (LTCG).

LTCG up to Rs. 1 lakh during a financial year are exempt from taxation. Amounts above this threshold are liable for taxation at a rate of 10%.

When investing in tax-saving mutual funds, investors should consider choosing a reliable financial platform that has a collection of the best-performing schemes. In this regard, Bajaj Finance Mutual Funds can be an excellent choice. Explore over 1000 mutual funds on the all-in-one platform and invest in multiple fund schemes as per your preference in a few clicks.

About Bajaj Finance Limited

Bajaj Finance Ltd. (‘BFL’, ‘Bajaj Finance’, or ‘the Company’), a subsidiary of Bajaj Finserv Ltd., is a deposit-taking Non-Banking Financial Company (NBFC-D) registered with the Reserve Bank of India (RBI) and is classified as an NBFC-Investment and Credit Company (NBFC-ICC). BFL is engaged in the business of lending and acceptance of deposits. It has a diversified lending portfolio across retail, SMEs, and commercial customers with a significant presence in both urban and rural India. It accepts public and corporate deposits and offers a variety of financial services products to its customers. BFL, a thirty-five-year-old enterprise, has now become a leading player in the NBFC sector in India and on a consolidated basis, it has a franchise of 66.05 million customers. BFL has the highest domestic credit rating of AAA/Stable for long-term borrowing, A1+ for short-term borrowing, and CRISIL AAA/Stable & [ICRA]AAA(Stable) for its FD program. It has a long-term issuer credit rating of BB+/Positive and a short-term rating of B by S&P Global ratings.

To know more, visit www.bajajfinserv.in.

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