Shreya: Hey Raj, I’ve been reading up on ELSS (Equity Linked Savings Schemes also popularly known as Tax Saver funds), and I saw a comparison that reminded me of how some businesses get disrupted by big changes. Can you explain what that means?
Raj: Sure, Shreya. Imagine how Blockbuster (US based company was once a dominant force in the home entertainment industry, known for its video rental stores which once dominated video rentals, was overtaken by streaming services like Netflix. Just like Blockbuster struggled to adapt to new technology, ELSS funds are now facing challenges because government policies are shifting. The new tax regime is making traditional tax-saving benefits less attractive.
Shreya: I get that. So if I’ve already completed the three-year lock-in period for my ELSS, should I consider selling them off or hold onto them?
Raj: Think of it like deciding whether to keep an old appliance. If it still works well and you don’t need money urgently, you might keep it. But if it’s underperforming or you have a better alternative, you might sell it and upgrade. Similarly, if you need cash or feel your ELSS fund isn’t performing compared to others, you could consider liquidating. However, if you’re in it for the long term, sticking with your investment to benefit from market cycles and compounding might be the better choice.
Shreya: That makes sense. What kind of returns have ELSS funds been delivering over the years?
Raj: Over any 3-year period in the last decade, ELSS funds have averaged about ~14% annual returns, though there have been periods when returns dipped to ~ -7%. If you extend the period to five years, the average return is ~ 13%, and the worst case was around -2%.It’s similar to saving money in a piggy bank over time—the longer you leave it untouched, the more you benefit from steady growth, even if there are occasional dips.
Shreya: And how do ELSS funds compare to flexi-cap funds?
Raj: Imagine you have two similar grocery stores in your neighborhood. Both offer the same quality of products and prices over time, even though one might have a few restrictions like a minimum purchase. In the investment world, aside from ELSS’s three-year lock-in and tax benefits, both ELSS and flexi-cap funds tend to deliver similar long-term returns—above 12.8% annually over five- to seven-year periods. So for long-term wealth building, either option could work well.
Shreya: Got it. What about ongoing SIPs in ELSS funds? Should I continue or think about switching strategies?
Raj: Think of your SIPs like a regular gym membership. If you’re committed and disciplined, the membership keeps you in shape over time, even if you’re not getting an immediate transformation. The three-year lock-in in ELSS funds acts like that commitment—it prevents you from making hasty decisions. However, if you find another gym closer to your home with similar facilities (or in this case, a flexi-cap fund offering similar growth), you might consider switching, especially since the new tax regime reduces the advantage of those upfront tax benefits.
Shreya: So basically, if I don’t need immediate access to my funds and I’m focused on long-term growth, I should stick with my ELSS. But if my needs or performance expectations change, I might think about switching?
Raj: Exactly. It’s like deciding whether to keep using an old car or buying a new one. If the old car still runs well and meets your daily needs, there’s no rush to change. But if it starts costing too much in repairs or isn’t performing as well, you’d consider a new model. Align your investment choices with your financial goals and comfort with risk.
Shreya: Thanks, Raj. Using these everyday examples really helps me understand the concepts better!
Raj: I’m glad to hear that, Shreya. It’s always useful to relate financial decisions to day-to-day scenarios so you can see how they play out in real life.
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