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ELSS tax saving funds are a class apart. Here’s why.

While ELSS funds are well-known for their Sec 80 C tax benefits, there is a lot more to them. Though essentially equity funds, they do have some unique traits.

It’s December and many might be scouting for the best Equity Linked Saving Schemes (ELSS) to add to their portfolio. While ELSS funds are well-known for their Sec 80 C tax benefits, there is a lot more to them. 

Though essentially equity funds, they do have some unique traits. 

Diverse risk profiles

ELSS funds have a slightly different risk profile than your typical large cap equity fund. Average market capitalisation of these schemes differs widely from Rs 31,000 crore to Rs 2,05,000 crore, as per the latest portfolio data. While some were heavily biased towards mid-caps, others were primarily into large caps. 

ELSS funds are essentially multi-cap funds. However, some are actively incorporating mid-cap and small cap into their portfolio, while those with large assets are increasingly becoming more like large cap funds. Mid-caps and small cap can fetch higher returns, but can also witness much higher volatility and can take much longer to recover post market falls.

Way back in 2017, when funds got classified into large-cap, mid-cap and small-cap, the regulator SEBI mandated the extent of portfolio to be invested into stocks of different capitalisation. For instance, large cap funds need to invest 80% of their portfolio into large-cap companies.

However, no such stipulations were put for ELSS funds. 

It’s important to know the kind of approach the fund is taking. Don’t just look at returns. Pick and choose funds that works for your needs beyond saving tax.

Investor friendly

You can start investing in ELSS funds by investing as low as just Rs.500. It has the shortest lock-in period of three years among the various tax-saving instruments – be it ULIPs, Bank Fixed Deposit, or PPF. 

Usually retail investors invest in ELSS funds to get the tax deduction of up to Rs 1.5 lakh in a single financial year, under Sec 80c. 

Redemptions by large investors can irk fund managers (in liquidity management). Since, these funds are predominantly invested by many small investors; there is stability in its assets. There is no study as yet to prove if that feature enables better fund performance. However, one can safely assume that the lock-in enables fund managers to take a long-term view on their investments – without worries of large-scale redemption. 

On an average, these funds gave a return of 11.3 percent in the last 10 years as against 10.7 percent for S&P BSE 200 TRI. These are inflation-beating returns that beat all other tax-saving options in the market.

Out-performer

About 31 percent of the ELSS funds outperformed the BSE 500 TRI returns over a five-year period. Many fund managers have been able to add value to their investors through active fund management.

On an average, these funds gave a return of 11.3 percent in the last 10 years as against 10.7 percent for S&P BSE 200 TRI. These are inflation-beating returns that beat all other tax-saving options in the market.

How to invest?

As we approach the last quarter of the financial year, those who did not invest systematically in ELSS from the beginning of the year are likely to start now. 

If you haven’t invested as yet, lump sum is the only option. However, you can go for SIP (Systematic Investment Plan) from next year onwards to average out your unit cost through the ups and downs of the market. If you plan to invest Rs 1.2 lakh into ELSS (you will rarely invest the full Rs1.5 Lakh, as your EPF contribution also counts towards 80C deductions), SIP it every month for Rs 13,500 for 9 months (April to December). However, be aware that the lock-in period of three years starts from the date of purchase of units and not when the SIP registration began.

Takeaway

ELSS funds are long term oriented multi-cap funds for the most part. Remember to stay invested for the long-term (beyond just the lock-in of 3 years) to realise their true potential.

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