What is a bear phase?
We’re now officially in a bear phase. By definition, equity markets enter a bear phase when their major indices fall by 20% from their previous peaks. That happened yesterday. The Sensex and Nifty are now down by around 23% from the peaks they had touched in March 2015. While the sentiments around the markets might be negative, a bear phase spells good news for equity mutual fund investors. In fact, for ELSS or tax-saving mutual fund investors, a bear phase couldn’t have come at a better time.
Why invest in a bear phase?
The best way to earn high returns from equity mutual funds is by staying invested in them for the long-term. Here, long-term means a period of at least 5 years and more. When you invest in equity mutual funds for many years, you give your investments the best chance of growing thanks to the power of compounding. ELSS funds come with a lock-in period of 3 years, which means you’re forced to stay invested in them no matter what is happening at the stock markets. And that is how you earn high returns from them. More so when the markets are in a bear phase but the long-term growth expectations remain intact.
The Indian markets had earlier been in a bear phase between January 2008 and March 2009 and again between November 2010 and January 2012. The point to note here is that at both times, the bear phase ended in less than three years. And in both cases, the markets went up sharply after the bear phase. ELSS fund returns have also been impressive in the years following the bear phases.
ELSS in this bear phase
This is simple enough to understand why. Quality stocks are available at lower valuations during a bear phase and generate substantial growth as the economy starts to look up. When you invest in a well-performing ELSS fund, you don’t have to worry about selecting good stocks. The fund manager does that for you. You have to just make sure you invest in a fund that has done well historically over different phases of the market.
That is what you should do when you select an ELSS fund in the coming month and half to fulfill your 80C tax-saving obligations. Many tax-savers will be making last minute investments in ELSS funds and the current bear phase can actually turn out to be a great buying opportunity for them. The bear phase we’ve entered is largely because of the global slowdown. The India growth story continues to be strong, which is why investing now and staying compulsorily locked-in for three years will allow your investments to earn good returns while earning you a tax break as well.