For most people, ELSS equity funds make the most sense for their tax-saving investments
10-Feb-2022 •Dhirendra Kumar
The season for tax-saving is upon us, at least for those who haven't been conscientious enough to do so regularly throughout the year. Unfortunately, that still means far too many people who will make all their investments between now and March 31. There will also be the few diehards who normally leave this till around lunchtime on March 31.
However, if you are making your investments now, don't just choose whatever is being offered by a salesperson. For a variety of reasons, savers tend to make hasty and poor decisions while choosing their tax-saving investments. For one, many of those who wait till the end of the year are those who don't make any discretionary investments other than the tax savings. They're inexperienced in this whole activity and make a foray into investing only once a year, generally to fall prey to the first salesman who comes along. As long as an investment saves tax, they feel that the immediate job is done.
However, this approach is a waste of money. A good tax-saving investment must be an investment first and a tax-saver later. For most people, the investment that should make the most sense is in an equity ELSS fund. This is because salary-earners generally have already had some of the permitted amount go into fixed income through PF deductions and to balance that, equity is best. Moreover, at three years, the ELSS lock-in is shorter than all fixed income options but still long enough to be the right time frame for equity investments and damping out most of the risk. On top of that, ELSS returns are tax-free like all long-term equity returns.
With the powers-that-be giving up on controlling inflation, we seem to be in for a prolonged period of negative real returns from fixed-income investments. For any kind of long-term investments, they no longer make sense.