ELSS mutual fund inflows drop over 48% in July: Should You Invest?

According to monthly data issued by the Association of Mutual Funds in India, net positive inflows to equity mutual funds decreased by 42% in July to 8,898.25 crore from 15,497.76 crore in June 2022. ELSS funds, the most popular investment choice for tax deductions under section 80C, fell by 48 per cent in terms of positive inflows from 640.06 Cr in June to 327.85 Cr in July under the equity mutual fund category. For the month of July, ELSS funds’ net assets under management (AUM) totalled 1,47,910.92 Cr, up from 1,34,225.70 Cr in June.

For the purpose of building long-term wealth, ELSS funds are flexi cap funds that are categorised as all-season equity funds. Under section 80C, ELSS funds are the only investment category that comes with a lock-in period of 3 years for the purpose of tax deductions up to 1.5 lakh per annum. And due to the lock-in period, there are no provisions for making an early exit from this fund. Financial experts advise investors in this fund choice to hold their investments for the long term in order to achieve returns that outperform inflation while also providing tax benefits and wealth growth.

Commenting on the drop in equity inflows, Nitin Rao, Head Products and Proposition, Epsilon Money Mart said “The drop in equity inflows has been on account of various factors such as rising interest rates, weakening rupee, geopolitical tension which started in Central Europe earlier this year and the latest sparks in the strait of Taiwan. These factors have affected investor sentiments towards equities. However, retail participation in the equity market continues to be buoyant. AMFI data shows the total sip account now stands at 55.5 million with a monthly inflow of INR 12,276 Cr as of June 2022. These numbers showcase the confidence of retail investors and show that they still prioritise their savings through SIP.”

It is one of the finest equity fund categories for portfolio diversification since ELSS funds invest in companies with a variety of market capitalizations, including large caps, mid caps, and small Caps. Since ELSS mutual funds include underlying securities, their performance fluctuates according to market sentiment, hence there are no guarantees of returns. What should investors do following a sharp decline in ELSS fund inflow? Nitin Rao was questioned about this, and he responded “It’s always a good time to invest in the markets if it’s for long term i.e. around 7-10 years. Historically, it’s proven that equities have outperformed all other asset classes over a long-term period. We are in corporate earnings season and there have been no major hick-ups so far, monsoon is also progressing as per expectation, and with the festive session around the corner consumption demand is expected to be elevated. All these factors should assist domestic equity markets.”

He further added that “Investors should invest in line with their goal and time horizon if the investor is investing for claiming benefit under section 80c of the income tax act, then he or she should consider investing into ELSS funds. These funds invest pre-dominantly in domestic equity market so they should also benefit from the market movement both in the short and long term.”

Nitin Rao further stated that “Equity linked savings scheme is the only category of mutual fund which offers tax deduction under the provisions of Section 80C of the Income Tax Act. An investor is eligible to claim a total deduction of INR 150,000 in a financial year. However, the investment done in the ELSS fund is locked in for a 3-year period. It means that the investor cannot redeem his/her investment from ELSS fund before 3 years from the date of investment. In comparison to the other investment options under section 80C, ELSS stands out in terms of performance over a 3-year period.”

Commenting on the future performance of ELSS funds, he said “As on 31 July 2022, ELSS average category return has been 17.29% which is higher in comparison to equity large cap category (15.19%). Select funds in the category have delivered returns above 20% over 3-year period. Investors have benefited immensely from the investment in the ELSS category as the returns generated by this category outshine any other investment options available for investment under Section 80C. Going forward, these funds are expected to perform in line with their investment objective and strategy with an aim to outperform the benchmark and create alpha for the investors.”

Large cap funds in the equity mutual fund category saw a positive inflow of 1,090.91 Cr in July compared to an inflow of 2,130.35 Cr in June, a 48 per cent decline. Large & Mid Cap Funds saw a positive inflow of 1,119.80 Cr in July compared to 1,994.73 Cr in June, a 43 per cent decline. In July, the Mid Cap Fund category had a positive inflow of 1,244.67 Cr, down from 1,851.67 Cr in June and a fall of 32%. In July, the Small Cap Fund category had a positive inflow of 1,779.45 Cr, up from 1,615.92 in June, a rise of 10%.

Whereas flexi cap fund category recorded a positive inflow of 1,381.55 Cr in July which was 2,511.74 Cr in June a fall of 44%. The mutual fund industry’s total assets under management (AUM) increased from 35.64 lakh crore in June to 37.74 lakh crore as of July 31, 2022. The SIP accounts increased to 5.61 crore in July from 5.55 crore the month prior. In July, systematic investment plan contributions decreased slightly from the previous month’s Rs. 12,276 crore to Rs. 12,140 crore.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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