Do tax-advantaged ELSS funds add value to your portfolio?

6 January 2022
4 mins read
Do tax-advantaged ELSS funds add value to your portfolio?

The Association of Mutual Funds in India (AMFI) has pressed the government to enable debt-linked saving schemes for tax deductions, with the Union Budget only a month away. Tax-saving mutual funds are now equity plans. Here’s how the ELSS category as a whole has fared.

Is it better to save money on taxes or to invest?

Typically, these funds get the majority of their inflows between December and March of each fiscal year, as investors hunt for ways to reduce their tax bills. According to an expert, “the necessity to avoid tax is the initial purpose of most persons investing in ELSS. Investors prefer to cling on for longer time periods when risk-adjusted returns are healthy.”

As of November 30, 2021, 38 ELSS plans handled assets of Rs 1.43 trillion, according to Value Research. Five of the 38 programmes each managed to raise more than Rs 10,000 crore. ELSS returned 18 percent and 16 percent over three and five years, respectively, ending December 30, 2021. In these time spans, flexi-cap funds have generated comparable results.

At least 80% of the assets of tax-saving funds are invested in equities and equity-related products. Section 80C allows for a deduction of up to Rs 1.5 lakh.

ELSS plans, on the other hand, have suffered outflows since September 2020. These plans have had outflows except from inflows of Rs 1,552 crore in March 2021 and Rs 174 crore in November 2021. “ELSS is quite popular, particularly among paid people. Job losses were frequent in many areas, and for those who kept their employment, the capacity to take risks had decreased owing to the general uncertainty, which may have resulted in ELSS outflows,” adds another analyst.

Despite little lock-in, long-term investments

Experts argue that, despite the three-year lock-in, ELSS plans remain popular for long-term investments among individuals who prefer to stay committed. To be true, ELSS has the shortest lock-in duration of three years among tax-saving investments. “Though ELSS is seen as a tax-saving vehicle, investors have recognised over time that these plans may help them build wealth.” “As a result, many people have decided to hang on to their assets for the long term,” adds the expert.

According to experts, fund managers have some leeway when it comes to investing since the assets are anticipated to last a long time. “Because of the three-year lock-in, fund managers may take a little longer perspective.” Though all ELSS have a three-year lock-in, that’s where the similarities stop. The portfolios of the various schemes vary from one another. Some are flexicap, while others are huge caps. As a result, comparing one to another might be difficult,” experts note.

Having trouble finding your way in a busy basket?

ELSS, although being the only pure equity investment vehicle in the Section 80C tax deduction basket, is not as popular as other vehicles such as the PPF or EPF, according to some analysts. “Investors look into ELSS only if there is a need to invest after they have completed payments to EPF, PPF, and house loan repayment,” according to experts. According to them, investors often spend Rs 50,000 to Rs 60,000 in ELSS, with many opting for systematic investing plans.

At the conclusion of three years, some investors recycle their previous ELSS assets. In other words, they don’t invest new money; instead, they take money out of an existing ELSS and reinvest it in the same or another ELSS, claiming Section 80C tax advantages. “In the majority of situations, PPF has top-of-mind memory. ELSS is often used after NSC and bank tax-saving savings, as well as life insurance. Younger investors, on the other hand, are more open to the notion of investing in ELSS and earning market-linked returns, according to experts.

An ELSS serves two purposes: wealth building and tax reduction. The ceiling of Rs 1.5 lakh under section 80C, however, has to be increased to make it a relevant component of one’s portfolio. However, many analysts believe that such an increase would not occur very soon. At the very least, the government will wait a few years to see how taxpayers react to the new tax structure. All of these deductions are being phased out by the government in order to simplify the tax system.

Sources: Moneycontrol

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.