With a little more than two months from completing your tax planning exercise, many investors may ask whether investing in an equity-linked savings scheme (ELSS) is a good idea after their recent abysmal performance. ELSS has always been considered one of the most attractive investment avenues, but its recent return of 1.9 percent in 2022 has lately dissatisfied investors.
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The category has seen outflow due to its average performance compared with other fixed return instruments like Public Provident Fund (PPF) and tax-saving fixed deposits.
A look at ELSS performance
ELSS saw outflows in six months in the calendar year 2022. The inflows were muted except for July when the assets under management (AUMs) increased by approximately 11 percent. The total AUM of the ELSS category has seen a decline. In 2022, the category managed assets worth Rs 1.45 lakh crore, 9 percent down from Rs 1.61 lakh crore it managed in 2021.
AUM is the total market value of the investments that a person or entity handles on behalf of investors. Lower AUM means less investment is taking place.
Here are the latest YTD, 1-year, 2-year and 3-year returns of some of the ELSS funds:
| ELSS funds | YTD | 1-year | 2-year | 3-year |
| Parag Parikh Tax Saver Fund - Direct Plan - GrowthELSS | 0.34% | 4.18% | 19.45% | 23.29% |
| -0.76% | -3.72% | 11.70% | 12.38% | |
| UTI Master Equity Plan Unit SchemeELSS | ||||
| Kotak Tax Saver Fund - Direct Plan - Growth ELSS | -0.25% | 1.77% | 18.60% | 17.81% |
| IDFC Tax Advantage (ELSS) Fund - Direct Plan - Growth ELSS | 0.25% | -0.35% | 22.41% | 22.64% |
| Quant Tax Plan - Direct Plan - Growth ELSS | -0.69% | 6.20% | 31.15% | 39.47% |
| Mahindra Manulife ELSS Kar Bachat Yojana - Direct Plan - Growth ELSS | -0.05% | -1.27% | 19.01% | 18.76% |
| SBI Long Term Equity Fund - Direct Plan - Growth ELSS | 0.73% | 2.93% | 16.70% | 18.08% |
| -0.86% | - | - | - | |
| WhiteOak Capital Tax Saver Fund - Regular Plan - Growth ELSS | ||||
| PGIM India ELSS Tax Saver Fund - Direct Plan - Growth ELSS | 0.33% | 0.48% | 19.04% | 19.76% |
| Union Long Term Equity Fund - Direct Plan - Growth ELSS | -0.53% | -2.30% | 16.11% | 18.27% |
| HDFC Tax Saver Fund - Direct Plan - Growth ELSS | 0.06% | 7.35% | 20.49% | 16.61% |
(Source: Moneycontrol)
Possible reason for lower allocation to ELSS
Rachit Chawla, CEO and co-founder of Finway Fsc, thinks that the major reason behind the muted performance of the schemes has been the high inclination towards large-cap stock and growth strategy.
Also, with the introduction of the new tax regime, disallowing most tax exemptions, investors are probably seeking other opportunities for addressing their taxation needs.
So, should investors opt for it?
The incentives behind ELSS funds are such that even if these funds don’t do well or have higher expense ratios, individuals should invest in them, said Gaurav Rastogi, founder and CEO at Kuvera.
The year-to-date (YTD) return of ELSS categories has been negative recently, but one has to understand that it is linked to the market and may get impacted by volatility.
According to Nitin Rao, Head Products and Proposition at Epsilon Money Mart, if we see the average 3-year ELSS category return, it ranges from 13-14 percent, which is higher among other fixed return instruments.
"Investors should see the advantage that ELSS holds against other instruments, like a shorter lock-in period and investment flexibility. In any other investments, you have to hold your investment for longer periods which may cause liquidity and loss of opportunity problems. It's also imperative to understand that every instrument has its pros and con," Rao told CNBC-TV18.com.
Echoing similar views, Chawla of Finway Fsc said investors should consider a longer than three-year time horizon to get good returns in the case of ELSS.
Most ELSS funds are essentially long-term oriented multi-cap funds. This means that they invest in a wide array of companies across market capitalisation, keeping in mind the long-term growth of companies. Like any other equity scheme, they have the capability of generating good tax-efficient returns if the scheme performs well (in the long term).
Recently, the Security Exchange Board of India (SEBI) has allowed mutual funds with active ELSS to launch passive schemes. This should further encourage investors to invest in the ELSS. Investors should consider that investments are eligible for a deduction of up to Rs 1.5 lakh per financial year under Section 80C of the IT Act. Hence, the passive ELSS are way cheaper with a lower expense ratio as compared to the active ones.
"Investors get the tax advantage, and the lower expense ratio is something wherein investors will get directly benefited, and they will be able to save more money," Mahesh Shukla, CEO and founder of PayMe, told CNBC-TV18.com.
First Published: Jan 18, 2023 2:40 PM IST
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