ELSS Mutual Fund Inflow Falls Over 48% in July: Should You Invest?

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

With the aim of building long-term wealth, ELSS funds are open-ended funds that are categorized as all-weather equity funds. Under Section 80C, ELSS funds are the only category of investment that comes with a 3-year lock-up period for purposes of tax deductions until 1.5 lakh per year. And due to the lock-up period, there are no provisions for early exit from this fund. Financial experts advise investors in this fund choice to hold their investments for the long term in order to earn returns that outpace inflation while providing tax advantages and wealth growth.

Commenting on the decline in equity inflows, Nitin Rao, Head Products and Proposition, Epsilon Money Mart said, “The decline in equity inflows is due to various factors such as rising interest rates, weakening of the rupee, the geopolitical tensions that started earlier in central Europe. this year and the last sparks in the Taiwan Strait. These factors have affected investor sentiment towards stocks. However, the participation of individuals in the equity market remains dynamic. AMFI data shows that the total SIP account now stands at 55.5 million with a monthly inflow of INR 12,276 Cr in June 2022. These figures are a testament to the confidence of retail investors and show that they are still paying priority to their savings via the SIP.

This is one of the best 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. Because ELSS mutual funds include underlying securities, their performance fluctuates with market sentiment, so there is no guarantee of performance. What should investors do following a sharp drop in ELSS fund inflows? Nitin Rao was asked about this and he replied, “It’s always a good time to invest in the markets if it’s long-term, i.e. around 7-10 years. Historically, stocks have been proven to outperform all other asset classes over a long period of time. We are in corporate earnings season and there has been no major upside so far, the monsoon is also progressing as expected, and with the festive session approaching, consumer demand should be high. All of these factors should help domestic stock markets.”

He further added that “Investors should invest in accordance with their objective and time horizon if the investor is investing to claim a benefit under Section 80c of the Income Tax Act then he should consider investing in ELSS funds. These funds invest primarily in the domestic stock market, so they should also benefit from market movements in the short and long term.”

Nitin Rao further stated that “The equity-linked savings plan is the only class of mutual fund that provides a tax deduction under the provisions of Section 80C of the Income Tax Act. An investor can claim a total deduction of INR 150,000 in a financial year. However, the investment made in the ELSS fund is blocked for a period of 3 years. This means that the investor cannot redeem his investment from the ELSS fund for 3 years from the date of investment. Compared to other Section 80C investment options, ELSS stands out in terms of performance over a 3-year period.”

Commenting on the future performance of ELSS funds, he said: “As of July 31, 2022, the average return of the ELSS category was 17.29%, which is higher than that of the large cap equity category (15.19% ). Some funds in the category have generated returns of over 20% over a 3-year period. Investors have benefited immensely from investing in the ELSS class, as the returns generated by this class outperform all other investment options available under Section 80C. Going forward, these funds are expected to behave in accordance with their investment objective and strategy with the aim of outperforming the benchmark and creating alpha for investors. »

Large-cap funds in the equity mutual fund category saw a positive inflow of 1,090.91 Cr in July compared to an influx of 2,130.35 Cr in June, a drop of 48%. Large & Mid Cap funds recorded a positive inflow of 1,119.80 Cr in July compared to 1,994.73 Cr in June, a drop of 43%. In July, the Mid Cap Fund category recorded 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 recorded a positive inflow of 1,779.45 Cr, up from 1,615.92 in June, an increase of 10%.

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

Disclaimer: The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of Mint.

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Dolores W. Simon