I know that ELSS or Equity linked saving scheme is a type of equity mutual fund which invests in shares. I know that ELSS is a tax saving mutual fund. I also know that tax benefit comes with a lock in period of 3 years. I have basic knowledge of the ELSS. But I have a question.
Suppose, I have used all of my 80c tax deduction limit. Still I want to invest in equity linked saving scheme. Suppose, do not want to take tax benefit from the ELSS as I have invested in other tax saving instruments. Or, I just want to invest into the ELSS considering it an equity mutual fund.
Would it be a good investment decision? Do ELSS give a better return than the other equity mutual fund? would it be a wise investment minus tax benefit?
Questions are valid and I have a right to know the actual strength of tax saving mutual funds. Since, tax benefit is given by the government, we have a right to judge the capabilities of ELSS fund manager. Because ELSS has many inherent benefit over other equity mutual funds.
Positives to ELSS Funds
Often ELSS investor use the SIP method to invest. The SIP ensures the regular inflow of money. The fund manager can easily plan the future investments.
No Sudden Outflow
The investment gets locked for 3 years, thus the fund manager can be assured of the sudden outflow. In the bad market condition, the investor can’t redeem the investment because of the lock-in period. It gives fund manager an opportunity to take bold move.
Negative to ELSS
The ELSS funds spend more on the distribution than other equity mutual funds. The ELSS can spend upto 3.25% wheras for other equity mtual fund it is limited to 2.5%. This extra expense reduces the return of the ELSS.
The ELSS Comparable Funds
Basically, ELSS is an equity mutual fund. The investment of ELSS fund is similar to any other equity mutual fund. Like an equity mutual fund, the ELSS invest only in the shares. No Bond, No Debt.
The portfolio of an ELSS can have the shares of a large cap fund or a small cap fund. There is no such restrictions. However, most of the ELSS stick to large cap and mid cap companies. It do not go beyond top 500 companies.
Thus, we can compare ELSS with large cap category and Flexicap category. The large cap fund invests in top 100 companies while Flexicap fund invest in large as well as in small companies. It choose companies from the top 500 list.
ELSS Vs large-Cap Vs Flexicap Funds
For simplicity, I am comparing the return of ELSS against the large cap and flexicap funds. The risk and volatility also has its importance, But, I am keeping it apart. Let us judge the most important factor that is Performance.
Comparison of Category Average
The most basic comparison of a ELSS against the Largecap and Flexicap fund would be the average return of these categories. I have taken returns of one year, three year and five year periods. You can see the table of returns as well as the graph.
|Comparison of Category Average|
|1 year||3 year||5 year|
The blue bar shows the return of ELSS. Red shows the average return of Large cap and green shows the return of Flexicap funds.
You can see that in all three periods, the ELSS has beaten the large cap funds. The difference was at least 2%.
But, the Flexicap funds were ahead of the ELSS in three year period. In the five year period, The ELSS has again outperformed Flexicap funds.
Thus, In the category average parameter, the ELSS is a better choice against Large cap funds. But Flexicap funds is giving tough competition. Indeed, the flexicap funds are the true peer of ELSS.
Comparison of Return in Different Time Band
To check the consisitent peroformance of a mutual fund, we should not rely only on one year, three year or five year period. We should also check the performance of mutual funds during diffeent time bands. We should check that how was the performance of a fund during different years. It shows true strength of a mutual funds.
|Return of Last 6 Years|
In 2010, The ELSS fund has beaten Large cap. In 2011, Again ELSS got better return. Note, in 2011, funds made a loss and ELSS made least loss.
Since 2010, every year, the ELSS has given better return than the large cap funds.
Since 2010, The ELSS has beaten Flexicap in three years. While flexicap has outperformed
Average Return of Top 5 Funds
There are about 50 ELSS, while number of diversified equity mutual funds is more than a thousand. Thus, it may seem that comparing ELSS category with whole spectrum of equity mutual fund is not justified. There may be some very bad equity mutual fund which are dragging down the average return.
Hence, to get a foolproof idea, we would take the top five mutual funds from every category. These top 5 mutual funds are decided on the basis of the 3 year returns. Let us compare the average return of the top 5 mutual funds scheme of one category with other category.
|Average Return of top 5 funds|
|1 year||3 year||5 year|
When we took the top five funds of ELSS, large caps and Flexicap category, the difference narrowed. The one year return of ELSS has been greater than the Largecap and flexicap.
On the other hand, during the three year period the Flexicap funds were way ahead and large caps lagged behind. In the five year duration as well the flexicap outperformed while largecap and ELSS gave similar return.
The ELSS tax saving funds has been a better performer compared to large caps. While Flexicap fund can sometimes beat them. Thus, these are the recommendations.
- If you are getting the tax benefit as well, the ELSS is best mutual fund category to invest. You can choose from the best tax saving mutual fund.
- Even without the tax benefit, the ELSS are better than the large cap funds.
- But, if tax benefit is not a concern, the flexicap can give you more return. This higher return would be without any lock in period. So, you can get a best SIP investment plan.