Equity Linked Saving Scheme (ELSS) funds, popularly known as tax-saving mutual funds, have been the go-to investment option for investors looking to save on income tax and simultaneously earn returns on their investments. ELSS funds have gained popularity due to their ability to offer tax benefits, long-term investment horizons, and exposure to equities.
Investments in ELSS funds qualify for a tax deduction under section 80C of the Income Tax Act, 1961, up to a maximum of Rs. 1.5 lakh per annum. The investments made in ELSS funds have a lock-in period of three years, making them a viable option for investors seeking long-term capital appreciation.
ELSS funds have been in demand recently due to the recent economic recovery and the ongoing COVID-19 pandemic. The market has bounced back from the pandemic-induced lows of last year, and investors are now looking to capitalize on the growth potential of equities. In this article, we will explore the latest trends in ELSS funds and their performance in recent times.
Investment Strategy of ELSS Funds
ELSS funds invest at least 80% of their portfolio in equity and equity-related instruments, making them a high-risk, high-return investment option. Investors can choose between a dividend or growth option while investing in ELSS funds. The dividend option provides investors with a regular payout of dividends, while the growth option reinvests the dividends and increases the principal investment.
A systematic investment plan (SIP) can be used to invest in ELSS funds regularly. SIPs are a disciplined approach to investing a fixed sum of money at regular intervals, reducing the impact of market volatility on investments.
Recent Trends in ELSS Funds
The ELSS fund category has been one of the top performers in the mutual fund industry in recent times. The category average returns for the last five years as of August 2021 stood at 14.53%, while the three-year returns stood at 7.08% (Source: Value Research Online). The recent market rally has aided the performance of ELSS funds, and the category has outperformed the benchmark indices.
ELSS funds have been able to provide consistent returns to investors due to their exposure to equities. The performance of the funds depends on the performance of the stocks in their portfolio. The funds that have invested in companies that have benefitted from the pandemic-induced trends have gained higher returns.
The trend of investing in ELSS funds through SIPs has also gained momentum among investors. The SIP flows in ELSS funds have increased steadily, indicating the growing interest of investors. The industry SIP corpus for the equity category, including ELSS funds, stood at Rs. 117,584 crores as of July 2021, a 69% increase over the same period last year (Source: AMFI).
Innovation in ELSS Funds
The rise in popularity of ELSS funds has led to innovation in the category. Fund houses have introduced various investment strategies to cater to the needs of different investors. Some of the notable innovations are:
- ESG-focused ELSS funds – These funds invest in companies with high environmental, social, and governance (ESG) standards, in line with the investor’s values.
- Sectoral ELSS funds – These funds invest in specific sectors or themes, providing investors with focused exposure to a particular industry.
- Multi-cap ELSS funds – These funds invest in companies across market capitalizations, providing investors with diversified exposure.
The innovation in ELSS funds has made them an attractive option for investors looking to diversify their portfolios further.
Conclusion
ELSS funds have been the go-to investment option for investors seeking tax benefits and long-term capital appreciation. The performance of ELSS funds has been consistent due to their exposure to equities, and the industry has seen a steady inflow of funds through SIPs.
The recent rise in popularity of ELSS funds has led to innovation in the category, providing investors with a wide range of investment options. The steady inflow of funds and consistent performance of ELSS funds make them an attractive option for investors.
The investor must consider the risks associated with investing in the Indian financial market and gauge all the pros and cons before making investment decisions.
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