In this post, we reviewed the basic features of ELSS. While these are good tax-saving instruments, these may or may not be appropriate for an individual under their circumstances. Should you buy an ELSS this year, or should you stick to other 80C savings and private mutual fund investments, and leave this option alone? We look at your options below.

• Do you have other investments in mutual funds? An ELSS is simply yet another mutual fund couched under the hood of tax-saving. If you have other separate mutual fund investments, then you may end up owning the same stocks through different funds – and this is the problem of over-diversification. Having multiple mutual fund investments may lead to over-diversification, and this increases downside risk for your portfolio.

• Expense Ratios: ELSS’s have typically larger expense ratios than other mutual fund and index fund schemes, and this can eat into your earnings big time. Why do they charge more? No clear reason here. The regulatory body, SEBI stipulates a max expense ratio for products, and nothing forbids AMC’s (asset management companies) from setting a high expense ratio to enhance their margins. More so for ELSS’s as they are a high-demand product. So why buy a high-expense product just to save paying taxes to the government? Would you rather fund rich AMC’s than the needy poor or infrastructure projects in the country?

• They are risky: While they reduce the taxable income, ELSS’s are risky. A 3-year lock-in period may mislead investors to think of them as products which can enhance their investments in 3 years! NO, Not happening. ELSS are market-linked products, and 3-year is a very short term to see any returns. No reason to be shocked if your Rs. 1.5 lakh becomes Rs. 80000 after 3-years. In the long run though, you may hope for better returns.

In sum, though touted to be a channel for ordinary tax-payers to get a look-in into the stock market, ELSS’s come with many strings attached. Unless the other 80C options in a given year are not attractive, there is no real reason for tax-payers to fall into this trap. There are simpler, and more cost-effective means for investors to enter into the stock market.