Are ELSS profitable during market downturns?

The stock market faces a slew of risks, including the Russian invasion, rising oil costs and inflation, an impending rate hike, tighter liquidity, and sluggish economic development. It’s a long list. Many mutual fund investors are worried, particularly first-time and new investors. Some want to know if they can put their equity mutual fund investments on hold this year, particularly tax advantaged or ELSS funds.

As you might expect, the issue isn’t about ELSS funds; instead, investors ask for a strategy for their stock investments. When things appear to be in turmoil, many investors try to avoid taking any chances. They wish to reduce or eliminate their equity mutual fund investments. They want to make a risk-reduction investment allocation modification.


ELSS mutual funds offer a way to make decent returns while avoiding taxes. At least 80% of the assets of these funds are invested in equities. As a result, the potential returns are directly related to the stock market’s success. If you want to invest for a long-term goal like building a retirement fund or purchasing a new home, this could be a good alternative.

Here are the best strategies to make profits in a bearish market with ELSS:

Tax Savings: ELSS funds have been the only type of mutual fund that can claim a tax deduction of up to Rs 1.5 lakh per year if you invest in the plan. These funds are eligible for tax deductions under Section 80C of the Internal Revenue Code.

Even after the new tax system, which makes long-term capital gains from ELSS over Rs 1 lakh taxable, these funds remain one of the finest tax-saving investments. Compared to alternative investment options such as Unit Linked Insurance Plans (ULIPs) or Public Provident Funds, these provide better post-tax returns (PPF).

Short lock-in period: ELSS funds are locked in for three years, unlike other assets such as the Public Provident Fund, Employees Provident Fund, and National Savings Certificate, which have a five-year minimum lock-in duration.

Long-term return: Funds can grow if they are not redeemed after the three-year lock-in period has passed. Because these funds invest in equities, they can build significant wealth over time.

Higher Returns: Because these funds invest in equities, they benefit from the market’s increased returns. ELSS funds can provide you with twice as high returns as a traditional savings account. According to statistics, ELSS offers roughly 12% returns over ten years. Compared to PPF, which generates approximately 8%, this is a considerable boost.

Lower tax on profits: An ELSS fund is invested for at least three years. As a result, any profits from the sales of ELSS funds are long-term in nature.

Gains beyond Rs 1,00,000 are currently taxable at 10% under the current law. On the other hand, short-term capital gains are taxed at a rate of 15%. As a result, ELSS funds automatically result in decreased tax bills.

Benefit of compounding: Investing in equities funds with a long time horizon, such as 5-10 years, is usually recommended. By default, ELSS funds provide a disciplined long-term investment due to the lock-in period. This technique allows investors to benefit from the long-term power of compounding.

SIP Option: Investors who want to invest in ELSS might do so through a systematic investment plan (SIP). It enables the investor to invest a predetermined amount at predetermined periods. This permits the salaried class to regularly invest a set amount of money from their savings, usually once a month.

Final Thoughts

The asset allocation of ELSS mutual funds is mostly made up of equities and equity-linked instruments such as listed shares (65 percent of the portfolio). They might also be exposed to fixed-income securities.

While the three-year lock-in time is required, an investor has the option to continue investing after the lock-in period has expired, unlike with other tax-saving products, where your money matures or stops collecting interest once the lock-in period has expired. An investor can stay in the fund for as long as they wish, and the longer they stay, the smaller their investment risk is, while their chances of earning a greater return increase.

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