ELSS investments are simply not about saving taxes. I found why

Tax planning is a mandatory exercise performed by most individuals at year-end. They spend time choosing the tax saving option. However, few spend the time to include it in all of their financial planning. It’s no wonder that many individuals sell their tax-saving investments, including investments in equity-linked savings programs or ELSS, after the mandatory lock-up period ends. This could be a costly mistake that needs to be corrected as soon as possible.

For latecomers, tax planning mutual fund schemes or ELSS come with a mandatory three-year lock-in period. ELSS investments of up to Rs 1.5 lakh in quality for tax deductions in a financial year. Many investors invest in these programs because of their short lock-in period. They sell their investments as soon as the lock-up period ends. Some also recycle them: resell and reinvest the money again to benefit from tax deductions.

Why do we say you shouldn’t? First, ELSS are equity mutual funds. This means that you must invest in it with a long-term investment horizon. If you do, these schemes may offer you better returns. For example, the category has offered an average return of 14.78% over 10 years.

Second, they are a great addition to your long-term wealth building options. As said earlier, these schemes are nothing but equity schemes that invest in stocks. They generally follow a flexi cap investment strategy. So you can use them as a flexible ceiling system. You will be surprised to learn that many investors hold their investments for many years.

Once they have completed their mandatory lock-up period, you are free to sell your investments at any time. However, you should only sell your ELSS investments when they underperform their peers for a long time. Or when you need Tyne money for a financial goal.

Still frowning? Consider this example. Suppose you invest Rs 10,000 every month in an ELSS. In other words, you invest Rs 1.2 lakh every year. Suppose you continue this practice for 10 years. Guess how much wealth you would have created after 10 years? Assuming an annual return of 12%, you would have created a corpus of Rs 23.23 lakh in 10 years.