Equity-linked savings schemes (ELSS) generated an average of 16.8 per cent and 16.6 per cent over the past three and five years, respectively, compared to the benchmark return of around 17 per cent. Compared to this, the large-cap equity mutual funds generated a 14.75 per cent return in three years and nearly 15 per cent in five years, according to data from the Association of Mutual Funds in India (AMFI) as of March 13, 2024. Over a 10-year timeframe, ELSS schemes’ average returns were 16.31 per cent, and large-cap equity mutual funds’ returns were 14.34 per cent.

Experts recommend that although senior citizens are generally risk-averse and prefer safe instruments, they should consider equity investments for potentially higher long-term returns than guaranteed income assets. The post-retirement corpus must generate inflation-beating returns in the long run, which is impossible only with guaranteed income instruments like bank FDs.

Also Read: Tax-Saver Fixed Deposits (FDs): Should Seniors Invest In Them?

Here, we discuss ELSS funds and what senior citizens should consider before investing in them. Here are some: 

Time-Horizon: 

Tejas Gutka, Fund Manager at Tata Asset Management, says, “Equity as an asset class is a long-term investment avenue; within that, ELSS funds come with a 3-year lock-in. Investors should be mindful of this before committing capital.” ELSS has the shortest lock-in period compared to other tax-saving options in the market. So, plan accordingly, considering the investment horizon.

Risk Appetite:  

People have different risk tolerance levels. ELSS funds primarily invest in equity and can be volatile in the short term. So, based on your risk appetite and other factors, like inflation, determine whether it is worth investing in ELSS and how much to invest.

Gutka says, “All market-linked investments should be considered, considering the investor’s risk profile and investment horizon. Equity typically attracts investors due to the tax benefits under section 80C of the Income Tax Act. If a senior citizen has the appropriate risk profile, appetite, a longer-term investment horizon, and the need to save taxes, then they can look at ELSS funds.” However, he adds that knowing whether ELSS suits a particular senior citizen can better be done by their financial advisor.

Also Read: New Vs. Old Tax Regime, What Suits Best For A Retiree?

Look For Consistent Returns:

Past returns are essential criteria to check fund performance, but they should not be the only deciding factor. Currently, some 35 asset management companies offer ELSS funds, so select one based on their long-term performance. Consistent returns are more important than a record return in a particular year. Additionally, check the portfolio allocation of large, mid, and small-cap stocks, besides the fund manager’s past performance and experience.

Diversify Funds:

Investing in the same AMC year after year may increase the risk of concentration in a portfolio. So, diversify ELSS schemes by including different fund houses. Note, over-diversification can also be unhealthy.

Mayukh Datta, Chief Business Officer of ITI Mutual Fund, says, “When investing in ELSS funds for tax-saving purposes, it’s prudent to limit your selection to 1-2, or at most three schemes. ELSS funds are best suited for long-term investing, with an investment horizon of 5 to 7 years or more. This time frame allows for potential growth and the realisation of tax benefits.” 

Systematic Investment Plan (SIP) or Lump Sum:

Investing through SIP, STP, or lump sum is up to the investor. Gutka says, “Given the volatile nature of equity markets, we generally advocate a staggered investment approach through systematic transfer plans (STPs) or SIPs.” One may decide on these investment based on the amount and individual preferences. Remember that the lock-in applies from the date of investment; so in the case of SIP, every instalment is counted three years apart. For instance, in a monthly SIP, an investment on January 1, 2024, will be locked in up to January 1, 2027, and for February, it will be up to February, and so on.

Expense Ratio:

While comparing different ELSS, check their expense ratio. This is the fee mutual funds charge for managing the fund. The expense ratio is the percentage of the asset under management (AUM). It can significantly affect the investment value over the long term. The lower the expense ratio, the better.

Also Read: Complaints Under RBI’s Ombudsman Schemes Rise 68% To Over 7 Lakh Crore In 2022-23

If Not Tax Saving:

One more vital point to consider with ELSS is that if there is no scope for 80C benefits due to the limit being exhausted by other investments or switching to the new tax regime where 80C benefits are unavailable, investing in ELSS solely depends on one’s preference.

Dutta opines, “ELSS funds can serve as a safeguard against impulsive investment decisions. Investors prone to selling off investments too quickly can use ELSS funds to counteract this behaviour. The lock-in period can prevent premature exits, promoting disciplined investing.”

“If not for tax benefits, open-ended mutual funds are a better investment option than ELSS funds as they may have a lower lock-in or expense ratio”, says Gutka.

Whether for tax savings or not, equity investment usually takes a longer time horizon to grow, which could be more than three years. Considering these factors, senior citizens may decide ELSS suitability for them.