61% ELSS mutual fund schemes underperformed their benchmark category in three years. Should you worry?

Around 61% ELSS schemes have failed to beat their respective benchmarks and category average in a three year horizon, an analysis of performance by the ELSS category showed. There were around 36 ELSS schemes in the category that have completed three years of existence in the market. Around 22 ELSS schemes failed to beat their respective benchmarks and category average in a three year period.

Axis ELSS Tax Saver Fund, the largest scheme in the ELSS category based on assets managed, failed to beat its respective benchmark and category average. The scheme manages assets of Rs 34,025.15 crore. Mirae Asset ELSS Tax Saver Fund, the second largest scheme in the category based on assets managed, underperformed against its category average and benchmark.

Groww ELSS Tax Saver Fund, the smallest scheme in the ELSS category based on assets managed, failed to beat its benchmark and category average. The scheme manages assets of Rs 43.89 crore.

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Aditya Birla SL ELSS Tax Saver Fund failed to outperform its benchmark and category average in a three year horizon.

Should investors be worried about the performance of ELSS schemes? “Even without delving into peer return comparisons within the category, ELSS funds stand out as a tax-saving option under 80C. With a comparatively low lock-in of 3 years, tax-exempt gains of Rs 1 lakh per annum, and higher long-term returns than small savings. ELSS combines high returns, wealth creation, tax efficiency, and liquidity better than most tax-saving investments, says Adhil Shetty, CEO, Bankbazaar.com

The ELSS category gave an average return of around 17.63% in a three year horizon. The schemes are benchmarked against NIFTY 500 – TRI, S&P BSE 500 – TRI, and S&P BSE 100 – TRI. These benchmarks offered 18.13%, 18.14%, and 16.38% respectively in a three year horizon.

“Another thing you must keep in mind is that ELSS funds are typically benchmarked to the Nifty 500 TRI and are generally large-cap oriented, but fund managers have the flexibility to not be tied to any one segment of the market by capitalisation. They can choose to have higher exposure in smaller companies. This will have an impact on returns and makes comparison within the category trickier since you may be comparing apples to oranges. You must study the fund strategy to understand the fund’s recent performance,” commented Adhil.

In a five year and 10-year horizon, the ELSS category offered an average return of 18.50% and 17.05% respectively.

“ELSS funds have the capacity to yield returns surpassing those of simple savings schemes. Data shows that the ELSS category has delivered 15-16% returns on average over the last 10 years. This alone is a compelling reason to pick an ELSS over or alongside small savings schemes such as PPF. While this volatility can be intimidating for some investors, the lock-in can have a calming effect and present opportunities for substantial growth when viewed through a long-term lens,” said Shetty.

“By allowing investments to remain untouched beyond the initial lock-in period, investors give their funds the chance to ride out short-term fluctuations and capitalise on the upward trajectory of the market over the years,” he added.

Outperformers

SBI Long Term Equity Fund, the oldest scheme in the ELSS category, managed to outperform its respective benchmark and category average in a three-year period.

Parag Parikh ELSS Tax Saver Fund outperformed its respective benchmark and category average. The scheme offered 22.13% in a three year period. The scheme is benchmarked against NIFTY 500 – TRI which offered 18.13% and category offered 17.63%.

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Should you invest in ELSS schemes? What strategy should you follow? “If you’re looking to invest in an ELSS, you can, however, avoid the obvious laggards over the four-year bull market we’ve seen, but also decide what you prefer more – growth with higher volatility, or stability with lower volatility – within the category, you’ll find both kinds of funds,” suggested Shetty.

Note, the above exercise is not a recommendation. The exercise was done to find which ELSS schemes failed to beat their respective benchmarks and category average in a three year period.

One should not make investment or redemption decisions based on the above exercise. One should always consider risk appetite, investment horizon, and goal before choosing any scheme for investment.