under the new tax regimeInvestors do not have the tax saving benefit that was previously offered in Section 80Cand has reduced investors’ interest in investing in ELSS Mutual Funds.
“The departures of ELSS funds can be attributed in part to the increasing adoption of the new tax regime. Under this new tax structure, taxpayers no longer receive tax benefits under Section 80C, reducing the incentive to invest in ELSS funds. As a result, investors are more inclined to explore other open-end mutual fund options,” said Manish Kothari, co-founder and CEO, ZFunds.
“As existing investments in ELSS funds come to the end of their lock-in period, investors are likely to withdraw their funds, especially if the investments were made with the primary objective of saving taxes. However, if these investors have switched to the new tax regime, they are less likely to reinvest in ELSS funds due to the absence of tax benefits. “This change in investment behavior could be an important factor contributing to the observed outflows from ELSS funds,” he added.
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According to monthly data released by the Association of Mutual Funds of India, ELSS funds have witnessed an outflow of Rs 2,030 crore since April 2024, with the highest outflow seen in July of Rs 637 crore. Since April 2024, based on monthly returns, ELSS mutual funds have offered an average return ranging from 0.88% to 7.16%.
Since these funds offer positive returns month on month, should an investor make an allocation in ELSS funds right now? The expert believes that these funds are recommended for investors who invest to save taxes. Therefore, investors who want to build a long-term equity portfolio should consider non-ELSS funds for their investments.
“These funds are recommended only for those investors who want to invest to save taxes. Investors looking to build long-term equity portfolios should consider investing in open-ended mutual fund schemes other than ELSS. The options, in terms of fund management strategies and themes that investors can participate in, through non-ELSS schemes are advantageous for investors,” recommends Kothari.
The finance minister made changes to the income tax slabs under the new tax regime in Budget 2024. The new tax regime does not allow deduction of common deductions such as Section 80C deduction of up to Rs 1.5 lakh. rupees for specific investments and expenses. Anyone opting for the new tax regime can now claim only two deductions – the standard deduction of Rs 50,000 from salary/pension income and Section 80CCD (2) for the employer’s contribution to the employee’s NPS account.
With the introduction of a new tax regime and no deductions under Section 80C, do ELSS funds look attractive now?
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According to the expert, investors who have or opt for the new regime should consider other equity funds for their portfolio other than ELSS funds.
“No, investors opting for the new tax regime should consider non-ELSS products for their equity portfolio,” Kothari said.
In the last three years, ELSS funds have offered an average return of 16.83% and the highest return offered by Motilal Oswal ELSS Tax Saver Fund of around 26.63% in the same period. Axis ELSS Tax Savings Fundthe largest ELSS fund based on managed assets, achieved the lowest return of 8.21% in the same period.
So far in 2024, ELSS funds have offered an average return of 24.83%. Motilal Oswal’s ELSS Tax Savings Fund earned the highest return of 47.41%, followed by HSBC’s ELSS Tax Savings Fund, which returned 35.71%. Samco ELSS Tax Saver Fund offered the lowest return of 10.97% in the same period.
After the latest performance of these funds, what are the prospects for these funds?
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“Under the new tax regime, ELSS funds should now be considered part of an investor’s flex-cap/multi-cap portfolio. In those categories, investors have the option to choose from a wider variety of fund management strategies. Investors are advised to consider non-ELSS schemes for their flex-cap/multi-cap portfolios,” Kothari said.
ELSS or tax saving schemes help investors save income tax under Section 80C of the IT Act. A maximum of Rs 1.5 lakh can be invested in a financial year and claim deductions on investments in a financial year. ELSS funds invest in stocks and carry high risk. These plans have a mandatory lock-in period of three years. Other investment options under Section 80C have a longer holding period.
ELSS or tax saving schemes enjoy EEA (Exempt-Exempt-Exempt) status. EEA status means that the amount invested, income earned and maturity amount are exempt from income tax.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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