ELSS funds offer lower returns, underperform benchmarks in one year. What should investors do?
Equity linked saving schemes, also known as tax saving mutual funds, are going through a rough patch. These schemes have been witnessing minimal inflows and low returns in the last one year. Many of these schemes failed to beat their benchmarks in one year. The ELSS category has posted an average return of 1.17% in the last one year..Most ELSSs are managed like flexi cap funds, which means that the fund manager has complete freedom to invest across various market caps and sectors. These schemes are a popular tax-saving method and have a lock-in period of just three years. This is the shortest among all tax-saving investments. Out of 34 ELSS funds that have completed one year in the market, nine schemes are offering negative returns and 20 are offering lower returns than 5% in one year.
Mutual fund advisors say that the primary reason for the muted performance of ELSSs over the last one year is their high inclination towards large cap stocks and growth strategy. “As we know FII are net sellers for more than a year now and most of the pressure has come on large caps. Secondly, post COVID, value style has outperformed growth so again underperformance because of that. But as we know performance of styles and capitalisation works in cycles. This is why we have seen most ELSSs not be great performers of late,” says Raj Talati, Founder, ABM investment, a wealth management firm based in Vadodara.
There are only three ELSSs which have managed to offer double digit returns in one year: Quant Tax Plan, PPFAS Tax Saver and HDFC Tax Saver. The latter two have offered 10% returns in one year, but Quant Tax Plan has been the clear winner with 16% returns. The scheme is also a topper in three-years with 40% returns. The fund house says that their reliance on data points and unbiased investment strategy has helped them stay ahead of the curve. The CEO of Quant MF says that their process driven-approach has helped Quant Tax Plan to outperform its benchmark in both medium and long term.
“Our investment strategies are very scalable and Quant Mutual Fund is a data analytics firm. We quantify every investment opportunity and aim to remain unbiased with regards to an investment opportunity. Quantification of data, remaining unbiased and being agnostic towards sector, style, market cap, etc. definitely gives us an edge. Also, we have developed a suite of Predictive Analytics tools that have the ability to quantify market sentiments which helps us in quantifying the market participants’ behaviour better. These tools are vital to our decision-making process and aid in identification of inflection points; thus, help us in staying ahead of the curve,” said Sandeep Tondon, CEO, Quant Mutual Fund.
Mutual fund analysts believe the category may make a turnaround soon. The returns in the short term are looking up as the market sentiment moves in favour of large caps. The ELSS schemes have done better in one and three months periods. However, mutual fund advisors say that the short-term ups and downs should not make investors take long-term investment decisions.
“Maybe as soon as the world settles down with inflation/Ukraine worries and if India's decoupling story goes well, we can again see inflows from FII resulting in better returns from ELSS. Investors who are already invested can't withdraw money for 3 years, but if they have completed the period, I would suggest to wait and stay invested for the long-term. However, if your goal is near or you can’t take the volatility, and have no capital gain liability, can switch over to other schemes. Returns will come in the long term, so don’t take hasty decisions,” says Raj Talati.
This story originally appeared on: India Times - Author:Tax Cognition
