A Special Pact, Earplugs & ELSS. What's the connection?

In Homer’s The Odyssey, at one point, Ulysses was returning home from a 10-year long war.

He encounters Sirens - beautiful and dangerous creatures - who sing spellbinding sweet songs to lure passing ships to their destruction. The dilemma Ulysses faces is that his heart yearned to experience the beauty of the Sirens’ song, but he also wanted to ensure that his ship passed safely (basically, have his cake and eat it too!).

So what did Ulysses do?

He tells his crewmen to plug their ears with soft beeswax. This would make them immune to the enchanting and deadly melody, so they could accurately steer the ship to safe waters. He also orders his crew to tie him to the ship’s mast so that he alone could hear the song, but not act on it - or steer the ship into danger. He was avoiding disaster- by preventing him and his crew from falling prey to emotions.

What can investors learn from this?

Emotions often get the better of us. We don’t realize that emotions can fog our vision, often leading us to not see, think, or hear clearly. This, in turn, results in poor decision-making.

Homer’s The Odyssey gives us some lessons on rationally approaching problems. The ‘Ulysses Pact’ is a commitment technique in behavioural psychology that “locks us in” to an action or decision in the future. It causes us to rely on logic when locking ourselves into a decision and then prevents emotion (however strong the urge) from causing irrational, impulsive behaviour.

Investing in an unemotional, disciplined manner over the long term is the secret to success. But how do we avoid distractions and emotions that tempt us, sway us off-course and into dangerous investment territory? How do we apply the Ulysses Pact to our own investing journey?

And what does all of this have to do with investing in ELSS?

Let’s examine reality.

For the salaried, what hurts the most is what they perceive to be ‘lower-than-I-deserve’ incomes, the tax that gets cut each month, and subsequently, the inability to have a reasonably disciplined approach to investing. While the first one is beyond our purview, the second and third issues have a solution- and a good one.

The smarter ones recognize that ELSS investments are a great way to save tax (due to the income tax exemption on up to Rs 1.5 lakh of investments made in tax saving MFs) and also offer the potential to earn long term equity returns. But most of us scramble only at the last minute to do this, falling prey to intense pressure and stress! Because at our core- we find it easier to ‘procrastinate’.

Even as tax-saving investors, we need to bind ourselves into “practising what we preach.” We already know that an optimal investment horizon is measured in multiple years and decades, not in days, weeks or months. We know that equity returns come with risk and volatility. We also know unforeseen events are a normal part of the investment experience and should be expected and weathered through. Despite being fully aware of these realities, many of us are not able to implement what we know to be true.

This is where a SIP in ELSS comes out as the ‘Ulysses Pact’.

A Systematic Investment Plan (SIP) makes investing regimented and disciplined while positioning you to generate potential wealth in the long term – due to the incredible power of compounding. It ensures that your ship (your portfolio) is not affected by the treacherous noise in the ‘market’, while you are bound to the mast - compelled to automatically invest a fixed amount at regular intervals, whether the market goes up or down. It also allows you to invest unemotionally and not take impulsive decisions.

Let’s look at some real-world scenarios that may push us to implement what we know to be true and earn higher returns versus acting on our emotions!

Takeaways from the chart above

From 2007 to 2010, the equity markets witnessed extreme volatility. Investor patience and perseverance were tested! Had an investor started a SIP at the inception of the DSP Tax Saver Fund (“Fund”) in February 2007, the initial experience would have been good (109.5%^ return, 1.4x their money, during the 10-month period from February 2007 to December 2007 - as indicated by label 3 in the chart above).
The 2008 global market crash saw a lot of investors exiting the market. The same investors who had earned a 109.5%^ return earlier experienced a -34.9%^ return, 0.7x their money, till February 2009 - as indicated by label 2.
Let’s assess what happened next. If the investors had held the same investment for just 1 year and 9 months longer, they would have earned an average annual return of 25.3%^, 1.6x their money, from February 2007 to November 2010 - as indicated by label 1.
SIP investments automatically add units irrespective of market volatility, as they are pre-configured to auto-debit for a particular amount of money on a particular date for a set period of time. Hold onto these for the long-term, as the reins that held Ulysses, to potentially gain favorable outcomes in the future.

Here is how a Rs 1,000 monthly SIP investment in the DSP Tax Saver Fund returned since February 20071:

Today, as the COVID-19 pandemic terrorizes the world, the markets are experiencing volatility. But emotions and temptations are prevented from affecting outcomes because our SIPs are the Ulysses Pact for our investments.

The Ulysses Pact with automatic investment contributions pays off:

When you add the many benefits of starting a SIP to the need to invest in ELSS, you arrive at an effective formula for potential success.

By planning a SIP smartly in ELSS, you can put away smaller, more affordable ‘fractions’ of Rs 1.5 lakh every month. Given that your income is likely to increase every year, your need to invest a certain amount annually in ELSS may go down (due to rising contributions to PF, especially if you’re a salaried employee) which means that you may never need to worry about tax saving again.

So think of it this way- starting a SIP in a tax-saving MF smartly, means you are not only tying yourself to the mast, but over time, you get to enjoy the music and possibly reach the harbor safely. And you need to do it only once- this single SIP could potentially take care of your tax-saving needs forever!

Click here to start your SIP in DSP Tax Saver Fund and never worry about saving tax again!