ELSSs or equity linked saving schemes help investors to save taxes under Section 80C of the Income Tax Act. Investors can save a maximum of Rs 1.5 lakh in a financial year by investing in these schemes. The category manages assets worth Rs 1.71 lakh crore. The category has lost some of its popularity after the government introduced the new income tax regime that doesn’t need mandatory investments like ELSS to save taxes.
An ETMutualFunds study showed that around 57% ELSS funds failed to beat their respective benchmarks in the three-year horizon. We analyzed the performance of around 37 ELSS schemes that have completed three years in the market and found out that 21 schemes failed to beat their respective benchmarks. In other words, only 16 schemes could beat their benchmarks.
ETMutualFunds looked at trailing returns in three years to see whether the performance of the schemes or the underperformance against their benchmarks.
Don’t be disheartened because your scheme failed to beat its benchmark. All the schemes in the category offered double-digit returns in the three-year period. The ELSS category offered an average return of 23.67% in the three-year horizon. The ELSS schemes are benchmarked against NIFTY 500 – TRI, S&P BSE 100 – TRI, and S&P BSE 500 – TRI. These benchmarks offered around 23.14 – 24.88% returns in the same time period. The toppers in the category offered more than 30%.
ETMutualFunds also analysed the yearly performance of ELSS funds in the last three years. Around nine ELSS schemes have underperformed their respective benchmarks continuously for three years.
Note, the above exercise is not a recommendation. The main purpose of the exercise is just to find out how the ELSS schemes have performed vis-a-vis their benchmarks in the three year horizon. One should not make investment or redemption decisions based on the above exercise.
As said earlier, ELSSs or tax saving schemes help investors to save income tax under Section 80C of the IT Act. One can invest a maximum of Rs 1.5 lakh in a financial year and claim deductions on investments in a financial year. ELSS funds invest in stocks and carry high risk. These schemes have a mandatory lock-in period of three years. This helps investors, especially new and inexperienced ones, to learn about the nature of equity markets and the volatility associated with it.
If you are looking for recommendations, see: Best tax saving mutual funds or ELSS to invest in 2023
