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.
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:
Do check out this week’s Q/A: Should I Exit Axis Long Term Equity Fund?
Pune DIY Investor Meet Fb 26th 2017
The second Pune workshop will be held on Feb 26th 2017. You can register for this via this link
You Can Be Rich Too With Goal-Based Investing
Amazon Hardcover Rs. 267. 33% OFF (kindle, link below)
Now just Rs. 280 with additional 10% discount with code: Republic10 at Infibeam
If you use mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!
- Ask the right questions about money
- get simple solutions
- Define your goals clearly with worksheets
- Calculate the correct asset allocation for each goal.
- Find out how much insurance cover you need, and how much you need to invest with nine online calculator modules
- Learn to choose mutual funds qualitatively and quantitatively.
More information is available here: A Beginner’s Guide To Make Your Money Dreams Come True!
What Readers Say
Where to Buy
Also at, Google Play Store (Rs. 244.30)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via: Feedburner
- We are also on Google PlusandPinterest
Do check out my books
Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner
The ultimate guide to travel by Pranav SuryaThis is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
Free Apps for your Android PhoneAll calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)