Arthgyaan

Supporting everyone's personal finance journey

Should you invest in ELSS Index Funds like the 360 ONE ELSS fund?

This article discusses a new category of ELSS funds relaunched in India that are run as index funds. Should investors invest in ELSS index funds for tax-saving purposes?

Should you invest in ELSS Index Funds like the 360 ONE ELSS fund?


Posted on 28 Dec 2022
Author: Sayan Sircar
8 mins read
📢Join 2400+ readers on WhatsApp and get new post notifications!

This article discusses a new category of ELSS funds relaunched in India that are run as index funds. Should investors invest in ELSS index funds for tax-saving purposes?

Should you invest in ELSS Index Funds like the 360 ONE ELSS fund?

Disclaimer: The fund names mentioned in this article are not recommendations to invest/not invest in those funds. Please perform adequate due diligence before making any investments. Past performance does not give any indication about future performance. You can lose all or part of your capital in mutual funds.

This article is a part of our detailed article series on the concept of ELSS Tax savings mutual funds in India. Ensure you have read the other parts here:

📚 Topics covered:

Introduction

This article is a result of the 360 ONE (formerly IIFL) Nifty 50 ELSS fund that got launched in December 2022. This fund will be investing in the same stocks as the Nifty 50 index, like every other Nifty 50 passive fund but with an extra feature. This fund will be an ELSS fund where:

  • the investments made in the fund are tax deductible, up to ₹1.5 lakhs/year, under Section 80C
  • each fresh investment made in the fund, SIP or lump sum, is locked for three years

Passively managed ELSS funds are not a new concept

There used to be a “Franklin India Index Tax Fund” that was closed way back in 2011 due to a lack of interest. The fund was merged with the Nifty 50 fund of the same AMC.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

AuM vs TER

AuM vs TER of Nifty 50 index funds vs ELSS funds

This is the current status of Nifty 50 index funds and ELSS funds in India. There is a good amount of spread in terms of the assets managed by both categories of funds but the distinction in terms of fund expense (TER) is very clear. Index funds charge lower expenses while active funds, like ELSS in this example, charge more. The question to ask here is “does more fees necessarily lead to better returns?”. We examine this question in detail below.

How long should you invest in ELSS funds?

It is our opinion that the ideal duration for investing in ELSS funds is three years. We are not advocating that equity investing is only for a short-term horizon like three years. Instead, we are saying that as soon as the 3-year lock-in period is over:

  • sell the units and reinvest immediately in the funds where you are investing for long-term goals
  • or, sell the units and reinvest in a different ELSS fund of your choice so that you do not have to invest additional capital to reach your 80C investment limit

How have ELSS funds fared against index funds for a 3-year investment horizon?

We have chosen index funds benchmarked against the Nifty 50 since the new 360 ONE fund is a Nifty 50 fund as well. In the sections below, we will show how ELSS funds have fared, as a point-to-point return estimate, vs the Nifty 50 index funds for 3-year investment periods. In each case, we will show how the performance vs. the expenses (TER) for the mutual fund. It should be noted that for equity funds, there is no guarantee of returns but the higher the expense, the lower the expected returns for two funds with the same investment philosophy.

3-year SIP return

3-year SIP return vs TER of Nifty 50 index funds vs ELSS funds

We are plotting the TER of the funds vs the 3-year SIP returns of the funds, for the 3-year period ending 21-Dec-22. However, for the active ELSS funds the returns are all over the place. There is no guarantee that even by paying the higher expenses, about half of the funds have given returns lower than the index funds.

3-year Lump sum return

3-year lump sum return vs TER of Nifty 50 index funds vs ELSS funds

We see the same result for a lump sum investment. Since these returns are point-to-point, here is the same chart for rolling 3-y lump sum returns.

3-year Lump sum rolling return

3-year rolling lump sum return of Nifty 50 index funds vs today's best and worst performing ELSS funds

The chart shows that today’s “best” performing ELSS fund has fluctuated around the returns of the index fund over a 3-year period using the previous 13 years’ worth of historical data. Today’s “worst” performing fund has also performed in the same way. This proves that there is no guarantee that either choice of today’s best or worst-performing ELSS will beat the Nifty 50 index fund over the next three years.

What should the investor do then?

Step 1: Evaluate if ELSS funds are really needed

If there is no need for an 80C tax deduction, there is no need to invest in ELSS mutual funds. Basically, there are two questions to ask here:

This is an article that will help you decide: How to plan tax deductions for salaried income?.

Step 2: Choose a suitable ELSS fund

If you are convinced that you do not wish to chase returns by investing in active funds, then index funds are suitable. The 360 ONE fund is a step in that direction.

If you are willing to take a punt with active funds, please refer to our guide on choosing ELSS funds: What are the best tax-saving ELSS Mutual Funds?.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Previous and next articles:

<p>This blog completes its second year with 100+ new posts in 12 months. Here’s looking back.</p>
Review
The 2022 Arthgyaan Year in Review

This blog completes its second year with 100+ new posts in 12 months. Here’s looking back.

Published: 25 December 2022

12 MIN READ


<p>This post sifts through 38 options to find the best ELSS funds for investing in 2023.</p>
Choosing Investments Tax Mutual Funds
What are the best tax-saving ELSS mutual funds in 2023?

This post sifts through 38 options to find the best ELSS funds for investing in 2023.

Published: 1 January 2023

5 MIN READ


Latest articles:

<p>This article provides a clear guide to navigating the insurance requirements when securing a home loan, helping you make informed decisions.</p>
House Purchase Loans Insurance
Understanding Insurance Requirements for Home Loans in India: What's Mandatory and What's Optional?

This article provides a clear guide to navigating the insurance requirements when securing a home loan, helping you make informed decisions.

Published: 15 May 2024

3 MIN READ


<p>This article discusses the steps for investors in high-income brackets but hesitant to commit to a home loan due to the fear of job instability.</p>
Behaviour House Purchase Loans
How to manage a home loan if you are worried about job loss?

This article discusses the steps for investors in high-income brackets but hesitant to commit to a home loan due to the fear of job instability.

Published: 14 May 2024

8 MIN READ


Topics you will like:

Asset Allocation (21) Basics (8) Behaviour (13) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (22) Health Insurance (5) House Purchase (33) Insurance (17) International Investing (12) Life Stages (2) Loans (20) Market Data (8) Market Movements (17) Mutual Funds (47) NPS (8) NRI (19) News (18) Pension (8) Portfolio Construction (53) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (16) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

This post titled Should you invest in ELSS Index Funds like the 360 ONE ELSS fund? first appeared on 28 Dec 2022 at https://arthgyaan.com


We are currently at 401 posts and growing fast. Search this site:
Copyright © 2021-2024 Arthgyaan.com. All rights reserved.