What makes an ELSS the ideal first mutual fund?
Mutual fund advisors say the category, with its mandatory lock-in period and buy and hold investment strategy, is the best first mutual funds an investor can have.
One, let us examine the mandatory lock-in period. As you know, like every tax-saving investment option available under Section 80C, ELSS or tax saving mutual funds come with a lock-in period of three years. According to mutual fund advisors, the mandatory lock-in period helps investors to get used to the volatility typically associated with equity mutual funds that invest predominantly in stocks. Since the investors do not have the exit option before the expiry of the mandatory lock-in period, they are forced to hold on to their investments and in the process they get an invaluable lesson about equity investing: you don't have to fear volatility and if you stick to your investment plan stock markets tend to reward you in the long run.
The mutual fund advisors also point out that the fund manager also benefits from the mandatory lock-in period in a way. Since he is not pressurised unduly due to short-term underperformance, the fund manager has the freedom to take long-term bets that will enhance returns over a long period. In fact, many mutual fund participants point out that positive results from ELSS often boost the confidence of first-time investors in mutual funds.
ELSS funds also serve as a stepping stone to the world of equity schemes for many investors. According to mutual fund advisors, once these investors get used to the volatility and witness their investments bounce back after a bad run in the stock market, they gain the confidence to start their investment in other equity mutual fund schemes. In fact, double-digit returns from ELSS convince many investors to take a serious look at equity mutual fund categories. With that, they learn the importance of investing in equity mutual funds to earn inflation-beating returns to create wealth over a long period.