Although there is no precise answer, the ideal number of ELSS mutual funds should be 2-3. Accumulating more funds means that the investor ends up owning virtually the whole market and giving up any chance of out-performance.
On the other hand, having just 1 ELSS fund can leave the investor vulnerable to fund manager or AMC (Asset Management Company) under-performance. In this article, we explain this in more detail.
Why 2-3 Funds is The Ideal Number of ELSS Funds?
Investment in an ELSS or tax-saving fund is eligible for tax deduction up to Rs 1.5 lakh per annum. This is given under Section 80C of the Income Tax Act, 1961. ELSS funds are required to invest at least 80% of their assets in equities (stocks).
These stocks can be large caps, mid-caps or small caps – there are no limits on the size of company an ELSS fund can invest in. This allows an ELSS fund to generate a high level of outperformance or alpha. You can view the high returns delivered by ELSS funds in the table below.
|ELSS Fund||3 years||5 year returns|
|Axis Long Term Equity Fund||11.60%||15.09%|
|ICICI Long Term Equity Fund||7.81%||10.37%|
|Aditya Birla Sun Life Tax Relief 96||7.99%||13.33%|
Source: Value Research, Data as on 12th August 2019
A typical ELSS fund, owns 70-100 stocks. Owning say 5 ELSS funds means (though not necessarily) a portfolio of as many as 500 stocks. This is akin to owning the entire market.
Although there are around 5,000 listed stocks in India, the top 250 stocks account for 90% of the total market cap. Owning even half of these stocks, virtually eliminates your chance of beating the market.
If investing in the market rather than beating it is your goal, you can achieve the same result by investing in a low cost Index Fund or Index ETF. These passively managed funds just follow the benchmark indices and charge much lower expense ratios than ELSS funds.
On the other hand, owning just 1 ELSS funds can leave you at risk from the fund manager or AMC under-performing.
Take the example of one such fund – Reliance Taxsaver. This fund was hugely popular in its heyday and had a large size (current AUM is still 9,659 crore). However the fund has faltered badly in more recent years. As of 12th August 2019, its one year performance was -16.11% compared to -3.19% for its benchmark (S&P BSE 100 TRI). On a three year basis, it has given just 0.75% annualized compared to 9.49% for its benchmark.
|Fund||1 year return||3 year return|
|Reliance Tax Saver||-16.11%||0.75%|
|S&P BSE 100 TRI||-3.19%||9.49%|
Source: Value Research, Data as on 12th August, 2019