Last Updated on December 19, 2021 at 7:16 pm
In the last quarter of the financial year, we are likely to encounter advertisements and sales pitches for how ELSS mutual funds are better than other tax saving instruments. A common sales pitch is that ELSS mutual fund investments are locked for three years and hence the fund manager can deploy funds without worrying about redemption pressure. Some have even suggested that this lock-in will help get better returns.
For those who can put two and two together, ELSS mutual funds come with an upfront commission (now, thankfully) capped at 1%. An ELSS SIP is a nice way to set up a constant commission stream for the intermediary and income stream for the AMC, with each instalment locked in for three years.
I had debunked this “myth” earlier: The Myth About ELSS Fund Lock-in but would like to revisit the topic of a lock-in when I saw this advertisement.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
In particular this image:
It is an image of a man enjoying an up close view of a crocodile while sealed up in a cage.
FYI, this is the full picture and the cage is known as er … “cage of death”!!
This cage of death is a trip “down under offered by Darwin’s Crocosaurus Cove.
Now let us look at the accompanying statement:
If your investments are locked in, you need not worry about market volatility
What is the implication here? The ELSS lock-in protects the investor from market volatility?
Or is it: Funds with a lock-in have lower market volatility?
Or is it: the money is locked-in, so there is no point in worrying about market volatility? 🙂 (would that sell?!)
I will leave the interpretation to you and focus on some hard facts.
ELSS mutual funds are not closed ended funds. The entire AUM collected during the NFO period is locked in for the first 3 years. Many years later, the fund will have a constant stream of inflows and outflows. So even if we assume a lock-in has a benefit (a myth), the AUM is not really locked-in. Investors can rush in to invest and there will always be a trickle of redemptions.
1 ELSS Mutual Funds: Risk vs Reward
The risk measured over a three year period and the return obtained over that period are plotted for all diversified mutual funds (open circles). The ELSS mutual funds are represented by red dots. Notice anything special about them? I cannot. Source: Value Research.
The funds at the higher end of the risk spectrum are mid-cap and small-cap funds
2 Reward: ELSS vs Other Categories
The three-year returns for all categories are shown below (source Value Research). Notice the ELSS funds offer a return quite similar to multi-caps, some mid-caps and a few large caps. Nothing special.
AMCs and their intermediaries are going to sell the way they see fit. It is up to us investors to be informed.
ELSS Mutual Funds Are Just as Risky/Rewarding as Other Diversified Funds
Their only advantage is that they help in saving tax. However, there is no free lunch. This saving comes with a lock-in.
Those who understand the importance of an asset allocation will recognise that there is no need for ELSS mutual funds. EPF, VPF, PPF, mandatory NPS, term insurance premium, or children’s tuition fees or a home loan tax benefit is all that one requires:
Making the best use of section 80C for tax saving: an example
Also see: Do not use ELSS mutual funds to save tax in the last minute!
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! You can watch podcast episodes on the OfSpin Media Friends YouTube Channel. 🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available! Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)