4 reasons why investors are shying away from ELSS funds — A look at current trends

Equity-linked savings scheme mutual funds traditionally have been considered by investors as part of Section 80C allocation. Since the provident fund and insurance could not address the entire exemption allocation of Rs 1.5 lakh, investors chose ELSS funds as it also provides the advantage of investing in equity while addressing their tax exemption needs.However, trends suggest that this investment scheme is losing its sheen lately. The total assets under management of the ELSS category has seen a decline.The AUM of ELSS funds by the end of the 2020-21 fiscal was at Rs 1.47 lakh crore and, over the last six months, it saw net flows of a meagre Rs 2,353 crore. These flows are starkly lower than other equity schemes, which saw net flows of at least Rs 11,000 crore each.As of now, ELSS as a category has 40 schemes from different AMCs, with a total AUM of Rs 1.55 lakh crore. Axis Long-term Equity Fund dominates the pack with Rs 31,600 crore AUM, followed by only seven schemes with AUMs greater than the Rs 10,000 crore mark.More than 50 percent of ELSS funds have less than Rs 1,000 crore of AUM.AUM is the total market value of the investments that a person or entity handles on behalf of investors. Lower AUM means less investment is taking place.So, what could be the possible reason for lower allocation to ELSS, despite its tax advantages?CNBC-TV18.com spoke to experts:The new income tax regimeWith the introduction of the new tax regime, disallowing most tax exemptions, investors are probably seeking other opportunities for addressing their taxation needs, said Gopal Kavalireddi, Head of Research at FYERS.The new tax rate regime does not enable many deductions and exclusions. If the taxpayer chooses the new regime's concessionary tax slab rates, deductions under Section 80C are not available.ReturnsThe 1-year average return of the 40 schemes under the ELSS category was 3 percent, with HDFC Tax Saver delivering the best returns of 11.8 percent, while Axis Long Term Fund gave a negative 11.9 percent return.The not-so-attractive return of ELSS may be another reason for lower allocation.Market conditionThe third reason could be that investors don't want to stay invested in a 3-year closed-ended scheme due to volatile stock market conditions."Often, stock markets perform well in the first two years and, by the end of the third year, see severe drawdowns, eliminating all the gains of the previous two years. Hence, investors opt to be more active in their investments, nimble-footed in their entries and exits, to capitalize on or retain higher gains," Kavalireddi said.ALSO READ | NFO launch | Baroda BNP Paribas MF announces 'Multi Asset Fund' — Key things to knowUnidimensional “tax-saving product” perspective Most investors typically do not tie investment goals with ELSS investments as much as they do with tax-planning goals. Hence, the fund flow behaviour may not be directly correlated with the returns alone, said Nirav R Karkera , Head - Research at Fisdom, while speaking to CNBC-TV18.com.ALSO READ | Mutual fund unitholders will now get dividends in 7 days, redemptions in 3-5 days"Considering market dynamics today with availability of more thematic mutual funds, higher participation in direct equities and broader indices brimming with optimism, the churn from ELSS funds to other categories and equity-related products are typically behavioural," he said.Can we expect any change in ELSS investments in future?A reading into the flow pattern suggests that investors may be viewing the category as an investment category after all, albeit at a gradual pace.Karkera believes that with more awareness around the product and deeper understanding of the efficiency with which funds in these categories deploy capital, we can expect the category to develop more interest and witness higher net inflows going ahead.Take our opinion poll to share your views about ELSS here. Click here

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4 reasons why investors are shying away from ELSS funds — A look at current trends

By Anshul Nov 30, 2022 8:36:50 AM IST (Updated)

ELSSs or equity linked saving schemes that help to save taxes are not favoured by many investors these days. CNBC-TV18.com spoke to experts and found out these reasons:

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4 reasons why investors are shying away from ELSS funds — A look at current trends

By Anshul Nov 30, 2022 8:36:50 AM IST (Updated)

ELSSs or equity linked saving schemes that help to save taxes are not favoured by many investors these days. CNBC-TV18.com spoke to experts and found out these reasons:

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