Recent outflows from ELSS shouldn't deter you from investing in them

The combination of high returns and short lock-in they offer is not matched by other Section 80C products

Equity linked savings schemes (ELSS) have seen net outflows every month this calendar year, barring March. Altogether, these funds have lost Rs 3,984.6 crore of asset under management (AUM) year-to-date. With the tax-saving season upon us, many investors will want to invest in these funds. Experts say the recent outflows should not deter them.

Profit booking in bullish market

One reason for the outflows is profit booking. “The markets have been trending upward. So, investors who have completed the three-year lock in may have wanted to book some profits and allocate elsewhere,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India.

The allure of higher returns may also have played a part. “Investors may have pulled money out in favour of options like direct equities,” says Vidya Bala, co-founder, Primeinvestor.in.

The Section 80C requirements of senior employees get fulfilled by their Employees Provident Fund (EPF) contributions, premiums paid on insurance policies, and contribution to the Public Provident Fund (PPF). “Younger employees tend to invest in ELSS. Many of them have shifted to the new tax regime where no tax-saving investments are required,” says Prateek Mehta, co-founder and chief business officer, Scripbox.

Given the uncertainty around income and job prospects over the past year, many investors may have chosen not to lock-in their money into this category.

Belapurkar points out that the outflows have not been massive. The quantum has been below Rs 1,000 crore in each month this year. “This is not high, considering that the total AUM of this category is Rs 1,50,175.4 crore,” he says.

The category’s performance shouldn’t be blamed for the outflows. ELSS are closest in character to flexi-cap funds. The performance of the two categories has been on a par (category average return for the past year has been 43.9 per cent for ELSS and 43.3 per cent for flexi-cap funds).

High returns, short lock-in

Investors who require the Section 80C tax benefit should invest in ELSS. “Since these are equity funds, they will give you much better returns than the other fixed-income options under Section 80C,” says Mehta. The category average return over five years has been 21 per cent compounded annually. Even the worst performer has given 15.1 per cent. Moreover, the lock-in of three years is the least among all the Section 80C options.

The lock-in is beneficial to both investors and fund managers. “Investors who find it difficult to stay invested in equities during market downturns will find ELSS useful. Fund managers, too, can adopt a buy-and-hold strategy because they can be sure that any money that comes in will stay put for three years,” says Belapurkar.

Be prepared to stomach volatility

Investors entering them must, however, be prepared for volatility due to their equity-orientation and also the way these funds are managed. “Many funds in this category tend to be quite volatile because they have a mid-cap orientation,” says Bala.

Investors will need to time their withdrawal carefully. “If, at the time of withdrawal the markets are down, you will have to postpone your withdrawal until they recover,” says Mehta.

Look for consistency

Invest in ELSS if your asset allocation permits (that is, you have made the required allocation to fixed-income instruments and can now allocate to equities) and you have a horizon of at least seven years.

Look for a few key characteristics when selecting a fund. “Go with a consistent performer. Prefer a fund that has been able to contain downside risk during market downturns. If you are a conservative investor, look for a large-cap oriented ELSS,” says Bala.

Belapurkar suggests diversifying among fund houses to get the benefit of different fund management styles.

After the three-year lock-in ends, don’t feel compelled to pull your money out. If you don't need the money, stay put to enjoy the equity-like returns and to avoid paying long-term capital gains tax (of 10 per cent on gains exceeding Rs 1 lakh).