Is ELSS suitable for senior citizens?

The idea that equity is risky and therefore suitable only for young people actually pushes many old, retired people towards financial problems

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A popular misconception is that Equity Linked Savings Schemes (ELSSs) are not suitable investment options for senior citizens and retired persons. This comes from the widespread notion that equity-backed investments in any form are unsuitable for older and/or retired people. The reality is the opposite though.

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The idea that equity is risky and suitable only for young people actually pushes many old, retired people towards financial problems. The reason for that is that everyone ignores the risk posed by the biggest threat to your financial well-being, which is inflation.

Equities may be volatile, but for investment periods of three to five years or longer, equity investments are actually low in risk and high in returns. For a long-range investment, short-term volatility is no concern. In fact, when you take inflation into account, bank FDs and similar deposits generate returns that are barely higher than the inflation rate and in effect, you lose value or barely maintain it. The purchasing power of your money reduces at about the same rate as its value increases in a fixed deposit. The thing to understand here is that, even after retirement, a part of your corpus earmarked to be used after a long-term, around five years or more, should be invested in equity to get inflation beating returns. And if you have a taxable income, there is no better alternative than an ELSS.

3 other advantages you should consider are:

  • The realised gains on ELSS are exempt up to Rs 1 lakh in a financial year. Gains exceeding Rs 1 lakh are taxed at 10 per cent. On FDs, the returns are added to the income and TDS is deducted yearly. The yearly deduction of TDS further reduces returns by making less money available for long-term compounding.
  • ELSS is more liquid because the lock-in is three years. In tax-saving FDs, the lock-in is five years.
  • Unlike other kinds of FDs, tax-saving FDs are completely illiquid. Not only can you not break them prematurely, you cannot take a loan against them either.

Like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. However, a smaller number of evenly spaced investments can also work.

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