ELSS or Equity Linked Savings Schemes are diversified equity mutual funds that provide tax deduction benefits under section 80C up to Rs 1.5 lakhs annually. balanced funds are hybrid mutual funds investing in a mix of equity and debt. They provide stability through the debt allocation while participating in equity upside.
The tax benefit allure of ELSS
A key attraction of ELSS is the tax deduction which reduces your taxable income. For those in higher tax brackets, this can mean substantial tax savings annually. The lock-in period is only 3 years against other 80C options like PPF’s 15 years. However, the tax benefit should not be the sole selection criteria.
The growth potential of balanced funds
While ELSS are pure equity funds, balanced funds have a dynamic mix of equity and debt. This provides a stability cushion and lower volatility compared to ELSS. The debt portion smooths returns while equity participation still allows for inflation-beating growth. This suits long-term goals like retirement planning.
Which is better for your Rs. 5-crore target?
For very long-term goals beyond 10-15 years, balanced funds may be more appropriate than ELSS. The latter is meant for shorter timeframes of 3-5 years. Balanced funds mitigate risk over the long term and optimise returns through asset allocation. The tax benefit of ELSS can be gained by staggering investments across years.
Start SIP investing early and stay disciplined
Whether you choose ELSS or balanced funds, the key is starting early. Assuming a 12% annual return, starting an SIP of Rs. 10,000 at age 25 will grow to around Rs 3.5 crores by 55. But delaying the start to 35 will yield only Rs. 1.1 crores. Use a mutual fund SIP calculator to determine the required monthly investment.
Split corpus across multiple funds
Don’t invest your entire corpus in just one ELSS or balanced fund. Split across 4-5 top-rated funds from different AMCs to mitigate risk through diversification. Moderate allocation of 10-20% of your target corpus in each fund is prudent. Rebalance occasionally to maintain asset allocation.
Consider lock-in and liquidity needs
With ELSS, your corpus will be locked in for 3 years from each investment. Balanced funds can be redeemed anytime. For goals over 10 years, lock-in is not an issue. But factor it in if you need liquidity in the short term. Stagger your ELSS SIPs so only a portion gets locked in annually.
Asset allocation and rebalancing are key
For balanced funds, check the fund’s asset allocation approach. Opt for funds that dynamically manage equity and debt rather than a fixed allocation. Review asset allocation periodically for rebalancing needs. In ELSS, rebalance across funds to maintain diversification.
Track performance and avoid knee-jerk reactions
Monitor the long-term performance of your chosen funds across market cycles. Resist the urge to frequently switch funds due to short-term underperformance. Give funds time to deliver results in line with their investment mandate and your asset allocation.
Make volatility your friend
Market corrections are inevitable. Rather than panic redeeming on downturns, use dips to increase your SIP amount in both ELSS and balanced funds. This accrues more units at lower prices, benefiting from rupee cost averaging. Volatility allows your money to work harder for you.
Personally suitable choice is key
Analyze your risk appetite, investment horizon and liquidity needs. Weigh tax saving needs and growth priorities. Look at long-term consistent returns, not just tax benefit. Ultimately, choose the mutual fund category that aligns with your financial goals and investor profile.
Conclusion
Whether you choose ELSS for tax savings and growth or prioritise stability with balanced funds, staying invested for the long haul is key. Keep your retirement target as the North Star to navigate short-term market ups and downs. With discipline and prudent fund selection, a 5-crore corpus is achievable.