Introduction 

Equity lock-in serves as a safeguard against impulsive investor redemptions. For those interested in simultaneously saving taxes and growing their wealth, Equity Linked Saving Schemes (ELSS) may be worth considering. While much has been said about the tax advantages and potential of equity investments, one often overlooked perk is the default ‘lock-in’ feature. Equity Box, your trusted investment advisor in Rajkot, makes understanding ELSS easy for every investor.

Understanding the “default effect”

The ‘default effect’ refers to the tendency for an option that is set as default among a group of choices to have a higher chance of being selected. 

The use of defaults in our daily routines has continuously evolved. We now rely on voice commands instead of typing, and thumb impressions have replaced traditional keys. Looking ahead, it is probable that driverless cars will take over the role of drivers. From auto-populated web pages to standardized coffee cup sizes, and even in areas such as public policy, the default option has undoubtedly demonstrated its effectiveness.

One might question why the ‘default setting’ is favored over other options. The answer being, it eliminates the need for users to make decisions.

The main issue at hand is ‘effort’. Opting for something other than the default option requires effort. The level of effort needed may vary, and only if the potential payoff outweighs the exertion, will a user be motivated to spend time making adjustments.

Strength of positive defaults

The ‘Default Effect’ and ‘Nudge Theory’ are commonly applied as successful methods for implementing public policy. For instance, the US government implements Nudge principles in its pension policy to promote long-term savings. By automatically enrolling individuals, the participation rate and subsequent retirement savings increase significantly.

Austria and Sweden have implemented a system in which organ donation is the default, assuming consent from individuals. Those who do not want to donate their organs must go through the extra step of filling out an opt-out form, which adds to the effort required. As a result, these countries have significantly higher organ donation rates of 99 percent and 86 percent, while Germany and the UK only have rates of 12 percent and 17 percent respectively.

A suitable default for equity instruments could be a reasonably long-term lock-in.

Market volatility has a significant impact on the mindset of investors, which can hinder their ability to create wealth. To overcome this impediment, it is crucial for investors to regulate their emotions during times of market downturn. Additionally, investments in tax-saving schemes come with a three-year lock-in period, which serves as a safeguard against impulsive reactions driven by fear during periods of sharp market corrections.

Two main concerns 

Liquidity 

Some alternatives to the top ELSS fund that offer tax benefits but require longer lock-in periods are the National Saving Certificate, Senior Citizen Saving Scheme, bank FDs, unit linked insurance plans (all with a 5-year lock-in), PPF (with a 15-year lock-in), and the National Pension Scheme (which is locked in until retirement).

Is 3 years a sufficient amount of time? 

To accurately assess this, we can analyze the three-year rolling returns of the top ELSS funds since the inception of this category in 1996. On average, these schemes have achieved a daily rolling return of 14.85%.

Conclusion 

Furthermore, there is no requirement to leave your investments after three years. By remaining committed to your ELSS investments and consistently contributing each year, you have the potential to earn greater returns over the long run.