Will 2019 be the year of ELSS investments?

It is a general tendency that investors think of equity as a risky asset class and end up choosing fixed income options. While fixed income options provide a steady rate of growth, it is lower than the inflation rate of the country. If you remain invested in such options, you might end up barely covering for inflation and there is no real growth happening. When we are investing for the long run, it is very important to choose an asset class that can deliver higher post-tax returns. Although the equity market can fluctuate in the short run, it is the very nature of the market. However, a long term approach will help deliver results.

This year, the finance minister has proposed in the Budget to extend the benefit of Section 80C for investments made in the central public sector enterprises (CPSE) exchange-traded funds (ETF) i.e, they will have similar tax benefits and lock-in period that is available to ELSS. The CPSE ETF consists of government-owned companies and holds very few stocks (10-11 stocks). If implemented, the investor will have one more choice to opt for.

Some of the popular features that ETFs are that it can be bought or sold on an exchange and it comes at a lower cost. Let us understand the implications in a slightly better way.

Traded on the exchange: This would also mean that just like stocks, it can be bought and sold on an exchange and would have to be held in a Demat format. Hence, investors need to have a Demat account. It would also mean that the NAV at which it can be bought or sold depends on demand and supply. Sometimes, there is a possibility that in the absence of a buyer, the NAV at which you want to sell your ETFs, might be lower than the actual NAV of the underlying portfolio.

 Concentrated Portfolio of 10  Government-owned companies (majorly energy and allied sector): This would carry a slightly higher fluctuation risk as compared to ELSS which is a better, diversified portfolio. Further, government-owned companies might be a better choice in case of debt investments but certainly not for equity investments. In many occasions, it is clear that government-owned companies are no longer good at running businesses due to a lot of economic pressure and interference by the government.

Certainly, both the options i.e. ELSS and ETFs are equity-oriented. More or less, both are rewarding in the long run. However, there is a possibility of different fluctuation risk in the short run and returns in the long run due to the parameters discussed above. One should not choose, ETF just because it is coming at a lower cost, as risk-return supersedes cost in the long run.