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Equity-linked Savings Scheme, commonly known as ELSS are a popular investment avenue among investors looking to expose their investments to equities while simultaneously saving on tax. Usually, ELSS investments are the highest during the last three to four months of the financial year as investors rush to earmark their tax-saving investment avenues before the deadline of tax submission. However, this year the number of investors investing in ELSS funds has dwindled.

As per the data released by AMFI (Association of Mutual Funds in India) on 9th April, 2020, the net ELSS inflows in FY 2020 between December 2019 to March 2020 was just Rs 3,834 crore. The net ELSS inflows is around 36% lower than the net ELSS inflows during the same period in FY 2019 and around 55% lower than the net ELSS inflows in FY 2018.

So why are investors shying away from ELSS mutual funds?

There are chances that with increased awareness about SIP investments (Systematic Investment Plan), investors are beginning to invest in mutual funds via SIP in the start of the financial year rather than investing a lumpsum in the end of the financial year. This might result in slower sales in the ELSS category. However, one could argue that the net inflow in ELSS funds in the entire FY 2020 was much lower than that of FY 2019 – Rs 8,187 crore in FY 20 and Rs 12,771 crores in FY 19.

Another reason for investors shying away from the tax saving mutual funds could be market volatility. But again, net inflows in equity jumped around astounding 52% to Rs 24,343 crores between Dec 19 to March 2020. Then, what’s the issue?

Experts believe that the drastic decrease in ELSS investments in FY 2020 could be because of the budget announcements. Budget 2020 includes a new optional tax regime that does not include most of the tax deductions and exemptions, including the ELSS tax saving exemption of Rs 1.5 lac under Section 80C of the IT Act. It must be noted that the taxpayers can continue to choose their old tax regime. Experts believe that the confusion to choose between the old tax regime and the new tax regime might have resulted in a lower net flow of ELSS investments.

Another reason could be the poor performance of these tax-saving mutual funds. Data shows that the returns on ELSS funds dipped from double digits in 2017 and 2018 to single digit returns in 2019 and 2020. Investors looking for the past performance and returns of ELSS mutual funds might not be satisfied and thus discouraged to invest in ELSS funds. This could have also contributed to the investors shying away from ELSS investments.

If you are an existing investor in ELSS funds, you might consider staying invested if you are satisfied with the performance of your fund. On the other hand, if you are a new investor, opt for funds with risk appetite matching yours. Happy investing!

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