Tax-saving mutual funds gave up to 60% returns in 1 year! Will the trend continue?

ELSS or tax saving mutual funds have been one of the most favored tax saving options under Section 80C of the Income Tax Act due to the shortest lock-in period of three years. Along with tax saving, ELSS funds provide inflation-beating returns and help in wealth creation for your long-term goals. "ELSS puts an end to an investor's search for a liable tax-saving investment option as ELSS is known to generate the highest returns under the tax-saving category. If we look at the returns generated by the majority of ELSS schemes last year, returns over 35% are clearly stated," says Palka Chopra, Senior Vice President, Master Capital Services.

In the last year, ELSS mutual funds have given amazing average returns of around 25%. The best performing scheme has given a whopping return of  60% and the worst performer in the category has given 11.5% returns in the same time period. Are these returns sustainable? Well, mutual fund managers believe as long as the stock market rally extends, ELSS schemes will continue to provide similar gains.

"Currently, equity markets have been rallying on account of global central banks driven liquidity. As long as this situation remains, markets will move higher and hence returns will be in positive territory. However, no one knows yet when global central banks could start raising interest rates which could be a trigger for market correction. But this seems to be an unlikely scenario in the near term," says Harish Bihani, Fund Manager - ELSS, ICICI Prudential Mutual Fund.

But there is no guarantee of similar high returns going ahead. Unexpectedly high returns are not sustainable. The benchmark index BSE Sensex has almost doubled from its Covid-led lows in March 2020. The high returns in tax saving schemes are due to the rapid reversal in the stock markets last year.

"The stocks market has reversed and rapidly gone up from its lows last year. The high returns that we see in equity schemes including ELSS funds are led by the market movement. Investors should not invest only on the basis of the last one-year return," says Saurabh Mittal, founder partner of a Mumbai-based wealth management firm, Circle Wealth Advisors. As a thumb-rule, ideally, we may expect returns around GDP plus inflation, Mittal adds.

"Just like any other equity funds, the returns of an ELSS fund too will be market-linked. Over long term, the aim of the fund manager will be to generate alpha over benchmark indices," says Harish Bihani.

Financial planners advise keeping a pessimistic return expectation to avoid any chaos later as you near your goals.

"We advise planning your investments with an ideal return expectation. And if you get a higher return, you can enjoy fulfilling your goal earlier but if you plan your investment with a higher return expectation, a lower return might be big trouble as you reach closer to your goal time," says Saurabh Mittal.

Harish Bihani advises naive investors to seek help of a mutual fund distributor for his or her guidance in selecting a suitable ELSS with a long-term track record and consistency in delivering good performance.

Financial experts advise investors to stick to equities to meet their long-term goals. They say, over long periods of time, equity is the most suited investment option as volatility is reduced substantially.

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