Will I get more returns from ELSS MFs because of lock-in?

Published: February 23, 2021 at 11:33 am

ELSS mutual funds are often sold with an incorrect pitch: Since they are eligible for tax-saving under Section 80C, each fund unit is locked for three years from the date of purchase. AMCs and sales guys state ELSS mutual funds can offer better returns or lower risk because of this lock-in. This article explains why this is incorrect, and there is no data to support ELSS funds can provide better returns or lower risk.

If you visit MotialOswal MF’s website, you can see this image (fourth image in the slider). It says, “when your investments are locked, you need not worry about market volatility”.

Screenshot of Motilal Oswal ELSS Fund advertisement from their website
Screenshot of Motilal Oswal ELSS Fund advertisement from their website

Legally, it merely means there is no point worrying about volatility when your investment is locked from redemptions – because you cannot exit! What is the nominal meaning of the statement, and how would a typical investor interpret it?

At the very least, it means ELSS funds have a different volatility profile compared to other funds. Is this so? Do ELSS funds offer better returns, as some claim? Before we consider the data, let us think this through. Most ELSS funds are open-ended.  That is, investors can freely invest and freely redeem units older than three years.

Suppose an AMC introduces a new ELSS fund. There will be a two week NFO period, and the fund (if open-ended) will open for new subscriptions after a couple of weeks. There will be no outflow from the fund for the first three years due to the lock-in and only inflows.


After that, units invested by those in the NFO period or close to it would be free to redeem. As the fund grows older, the no of units eligible for redemption would keep increasing. After a while, there will be no practical difference between an ELSS fund and any other fund.

Below are the return spreads and volatility spread (standard deviation) of ELSS funds (blue) and other funds. Other funds here refer to large cap, large and mid cap, mid cap, small cap, index funds, value funds, contra funds, dividend yield funds and aggressive hybrid funds.

The horizontal axis is simply the fund count and has no significance. Please focus on the spread on the vertical axis. This shows the spread between the minimum return/volatility to the maximum return/volatility.  The returns have been sorted in descending order.

3-year return spread of ELSS mutual funds compared with other funds
3-year return spread of ELSS mutual funds compared with other funds
3-year volatility (standard deviation) spread of ELSS mutual funds compared with other funds
3-year volatility (standard deviation) spread of ELSS mutual funds compared with other funds

Notice there is practically no difference in the return spread or volatility spread of ELSS funds when compared with other diversified funds. The same information is presented below for three and eight years.

5-year return spread of ELSS mutual funds compared with other funds
5-year return spread of ELSS mutual funds compared with other funds
5-year volatility (standard deviation) spread of ELSS mutual funds compared with other funds
5-year volatility (standard deviation) spread of ELSS mutual funds compared with other funds

 

8-year return spread of ELSS mutual funds compared with other funds
8-year return spread of ELSS mutual funds compared with other funds
8-year volatility (standard deviation) spread of ELSS mutual funds compared with other funds
8-year volatility (standard deviation) spread of ELSS mutual funds compared with other funds

Conclusion: There is nothing special about the lock-in associated with ELSS funds. They offer just as much return or just as much risk as any other diversified funds. Use ELSS funds only if you need them! You can refer to our ELSS selection guides:

Do share if you found this useful

My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower
Most investor problems can be traced to a lack of informed decision making. We have all 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?
Amazon review of Chinchu gets a superpower
Amazon review of Chinchu gets a superpower
What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? 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 parent’s plan for it and teach him several key ideas of decision making and money management is the narrative.
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Get Chinchu gets a superpower for your child!
How to profit from content writing: is our new ebook for those interested in getting side income via content writing. It is at available at a 50% discount for Rs. 500 only!
Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 520+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2125+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis 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 young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth 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 Rs 199 (instant download)
Free android apps