With the Union Budget just a month away, the Association of Mutual Funds in India (AMFI) has lobbied with the government to allow debt-linked saving scheme (DLSS) for tax deductions. At the moment, tax-saving mutual funds are equity schemes.
For most of us, an ELSS (equity linked savings scheme) has been our first mutual fund investment. Here is a look at how ELSS as a category has performed.
Tax-saving or investing?
Typically, these schemes get most of their inflows from December to March of each financial year, as investors look for avenues to save on income tax. “The need to save tax is the first objective of most individuals investing in ELSS,” says G Pradeepkumar, CEO, Union Mutual Fund. “Healthy risk-adjusted returns tend to make investors hold on for longer time frames.”
According to Value Research, 38 ELSS schemes put together managed assets worth Rs 1.43 trillion as on November 30, 2021. Five out of the 38 schemes managed more than Rs 10,000 crore each. Over three and five years ended December 30, 2021, ELSS gave 18 percent and 16 percent, respectively. That’s similar to what flexi-cap funds delivered in these time frames.
Tax-saving funds invest at least 80 percent of their assets in equity and equity-related instruments. Up to Rs 1.5 lakh is eligible for deduction under section 80C (along with many other investment avenues).
However, since September 2020, ELSS schemes have seen outflows. Apart from the inflows of Rs 1,552 crore in March 2021 and Rs 174 crore in November 2021, these schemes have seen outflows. “ELSS is very popular especially among the salaried individuals. In many sectors, job losses were common and for those who continued with their jobs also, the ability to take risk had gone down due to overall uncertainty around, which may have led to outflows in ELSS,” says Pradeepkumar.
Long term investments, despite low lock-in
For those who choose to stay invested, experts say that ELSS schemes are quite popular for long-term investments, despite the three-year lock-in. To be sure, among tax saving investments, ELSS comes with the lowest lock-in period of three years. “Though ELSS is seen as a tax-saving avenue, over a period of time, investors have realized that these schemes can generate wealth for them. This has made many hold on to their investments for the long term,” says Raghav Iyengar, Chief Business Officer, Axis Mutual Fund.
Fund managers also get some leg-room while investing as the assets are expected to be long term say experts. Suresh Sadagopan, founder of Ladder 7 Financial Advisories says, “Given the lock-in of three years the fund managers can take a slightly longer view.” Though all ELSS has a three years’ lock-in the similarity ends there. “Schemes’ portfolios differ from each other. Some are large cap oriented and some are flexicap. Hence comparing one with another can be a challenge,” he adds.
For example, IDFC Tax Advantage Fund has 57 percent allocation to large-cap stocks and rest in shares of mid and small-sized companies. Axis long Term Equity Fund however, has allocated 80 percent of the money to large cap stocks. More allocation to mid and small cap stocks can lead to volatility in short term, as on November 30, 2021.
Getting lost in a crowded basket?
Some experts feel that despite being the only pure equity investment vehicle in Section 80C tax deduction basket, ELSS is still not as popular as some of the other instruments like the PPF or EPF. Pankaj Mathpal, founder and managing director, Optima Money Managers says: “Investors look at ELSS only if there is a need to invest after they are done with contributions to EPF, PPF, home loan repayment.” He estimates that investors generally invest Rs 50,000 to Rs 60,000 in ELSS and many of them opt for systematic investment plans for the same.
“Individuals who have an HUF, tend to invest more. In some cases Rs 1.5 lakh per year,” he adds. Some investors also recycle their existing investments in ELSS at the end of three years. In other words, they don’t invest fresh money; they withdraw from an existing ELSS and simply reinvest in the same or another ELSS and claim Section 80C tax deduction benefits.
“PPF enjoys the top-of-the-mind recall in most cases. ELSS comes much later, typically after NSC and bank tax-saving deposits and life insurance,” observes Anup Bhaiya, Managing Director, Money Honey Financial Services. “Younger investors, however, are more receptive to the idea of investing in ELSS and earn market linked returns,” he adds.
An ELSS has two purposes – wealth creation as well as tax saving. However, to make it a meaningful component of one’s portfolio, the limit of Rs 1.5 lakh under section 80C needs to be enhanced. However, many experts are of the opinion that such a hike may not happen soon. “Government will wait for a couple of years more at the least, to check the response of the tax-payers to new tax regime. The government wants to do away all these deductions and simplify the tax system,” says a chartered accountant with a tax-consultancy firm who did not want be to identified.