While deciding to invest in a mutual fund scheme, should you pick an equity-linked tax-saving mutual fund scheme like ELSS (equity-linked savings scheme) or a debt mutual fund that is less risky? The answer would vary for different categories of investors since both categories of mutual fund investments have their own merits. Read on to know the benefits of investing in ELSS and debt funds, and how combining both of these investments can help you considerably grow your wealth over time.
What are ELSS funds, and what are the advantages of investing in them?
A minimum of 80% of the total investible corpus of an ELSS fund is invested in equity or equity-linked instruments. ELSS funds invest their capital across market capitalisations and sectors. These funds also impose a lock-in period of three years for investors, thereby restricting liquidity. You can benefit from a tax exemption offered by Section 80 C of the Income Tax Act by investing in ELSS funds. Please note that the income earned through ELSS funds is treated as LTCG (long-term capital gain) by the income tax department. Here are the key advantages of investing in these funds –
- You can easily diversify your investment portfolio: ELSS funds help you diversify your capital across various market caps and sectors. If you are bullish about a particular investment sector, you can choose an ELSS fund that focuses more on that particular sector. You can also strategically diversify your portfolio to minimise the overall portfolio risk.
- ELSS fund investments can start with ₹ 500: You can easily start an ELSS investment with ₹500 per month. You can significantly grow your income in a few years by starting with a ₹500 per month ELSS investment, as you will see in the example taken in the final section of this article.
- You can choose the SIP mode of investment: You can invest in ELSS funds through the SIP mode of investment and can benefit from rupee-cost averaging, thereby reducing the cost of investing in these funds.
How can debt fund investments be advantageous to an investor?
Debt funds are generally considered to be less risky as compared to ELSS investments since the latter invest in equity-linked instruments. Often, to reduce the overall risk of their portfolio, investors invest in debt mutual funds such as a liquid fund or money market fund. There are several categories of debt funds that cater to the many objectives of debt-fund investors, such as liquid funds, dynamic bond funds, corporate bond funds, banking and PSU funds, Gilt funds, and Floater funds.
Combining ELSS and debt funds for earning higher returns
Consider the following scenario. You are invested in an ELSS mutual fund scheme for a few years and have been earning high returns consistently. You noticed recently that owing to deteriorating market conditions, your returns have plummeted. Should you, in such a scenario, quit your ELSS fund and switch over to a debt fund? A popular example in recent times is the report published in 2019 of a 43-year-old mutual fund investor who continued his ELSS investments despite facing the after-effects of the 2008 economic crisis. The investor started his journey in 2005 with ₹500 as the investment amount and in 2019, earned a percentage return that was more than the average inflation rate in the previous 10-15 years. The solution lies in combining your debt and ELSS mutual fund investments to considerably grow your earnings in the long run. You can earn high returns via a mutual fund investment only if you invest consistently over a long period.
In conclusion, you must look to combine your ELSS and debt mutual fund investments to earn high returns in the long term and mitigate portfolio risk.
