Risks associated with the Equity Linked Savings Scheme
  • Market risk: Equity-linked savings scheme (ELSS) invests a major portion of your money in equity and equity-related securities; hence they are exposed to market fluctuations. A poorly performing market due to recession, inflation, interest rate fluctuation or political unrest may result in losses. Market risk or systematic risk is one of the risk factors to consider when investing in ELSS and the only way to tide over it is to be patient.
  • Liquidity risk: Equity-linked savings scheme has a lock-in period of 3 years, during which it cannot be redeemed. You might incur a loss on your investment depending on the prevailing market conditions and might not be able to withdraw funds because they remain locked. This is one of the risk factors to consider when investing in ELSS that is often overlooked.

What is an ELSS?

It is similar to a close-ended diversified equity fund that invests in equity shares of different companies across varied sectors and market capitalisations. Also known as tax saving mutual funds, it is the only category of funds that allow you to save tax when you invest in them

Why should you invest in Equity-linked savings scheme

Now that you are aware of the risk factors to consider when investing in ELSS, you should know that the benefits can outweigh the risks. Some of these are:

  • A maximum investment of upto ₹1,50,000 in ELSS funds qualifies for a tax deduction as per Section 80C of the Income Tax Act
  • ELSS are managed professionally and thus provide equity exposure without directly investing in stock markets, that can be risky for beginners
  • The 3 year lock-in period of Equity-linked savings Scheme helps investors realise the importance of planning for the long term. This is important primarily when investing in equity since it is only over a longer duration of time that funds can overcome market volatility to deliver better returns than other asset classes.
  • ELSS can deliver higher returns for more than 5 years as compared to fixed income instruments since they are equity-oriented. Returns are not guaranteed though

ELSS mutual funds carry considerable risk, however, they can give returns that can reduce the effect of inflation in the long run, which is an essential factor to consider while planning your portfolio. However, your risk-profile can vary depending on your age and life-stage. As an unmarried individual, you may have a higher risk profile compared to someone approaching retirement.