- Date : 21/12/2022
- Read: 3 mins
ELSS tax-saving mutual funds performed poorly in one-year returns with FII exits and a growth and large-cap focused investment strategy, but now recovering
Equity mutual funds are seen as the perfect investment strategy for a high return. It may be shocking perhaps, that in the US only 10% of the actively managed funds managed to beat the S&P 500 in the last 15 years. Last year, it was observed that in India only 461 of 905 actively managed equity mutual fund schemes beat their respective indices. Therefore, it is no surprise that in the last year, Equity Linked Saving Schemes (ELSS) have underperformed. Many ELSS funds returns have been lower than their benchmark indices.
These are mutual fund schemes with a high investment in equity and limited exposure to fixed-income securities. There is no investment upper limit on ELSS, but investments up to Rs 1.5 lakhs per annum are eligible as tax saving mutual funds under section 80C. There is a three-year lock-in period on ELSS investment. This is the shortest of all tax-friendly investments available in India.
Recent Performance of ELSS Funds
ELSS managers can manage the funds like flexi-cap schemes, with investments in different market caps and sectors. In the past, this strategy has delivered decent returns to investors. This, combined with the ELSS tax saving aspect has made it a popular choice in investment portfolios. However, the last year has seen a subdued response by most ELSS in India. Only 6 out of 34 ELSS funds have delivered a return of over 5%. 20 funds have had a growth of less than 5%, while nine others have seen a negative return. These 34 funds under scrutiny are the ones that have completed at least a year in the Indian mutual funds investment market.
It has been observed that ELSS funds had invested significantly in large-cap stocks. However, the incessant Foreign Institutional Investor (FII) exit from the market for the last one year has put pressure on these large-cap stocks. TCS, for instance, has been mostly downhill in the last one year, trading 5% below its share price from a year ago.
Besides, ELSS has focused on growth strategy, but it is the value style that has outperformed, particularly after the pandemic. The ones that have performed well have kept their investment strategy free from the cap or style-based inclinations. Prominent among them are Quant Tax Plan with returns of 16% during the year. PPFAS Tax Saver Plan and HDFC Tax Saver also had 10% returns each during this period.
What about the Revival of ELSS Funds?
ELSS funds have done well in the last one to three months. This is due to a recovery in market sentiments and India’s comparative resilience amidst global economic uncertainty and geopolitical tensions. Investors with ELSS investments that are older than three years may stay invested for long-term gains while keeping track of relevant mutual fund news.
Also Read: Exit strategies on ELSS
5 mistakes to avoid in ELSS and NPS
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.