Time to save tax

Despite a dip in their popularity, tax-saving funds, or equity-linked savings schemes, are still the best 80C avenue

The category of tax-saving funds, also called equity-linked savings schemes (ELSS), comes into focus in the last quarter of a financial year as investors rush to make their tax-saving investments. Here we take a look at the various facets of this category.

The AUM story

As of December 2021, the AUM of tax-saving funds stood at Rs 1.49 lakh crore as against Rs 1.18 lakh crore at the end of 2020. Though the AUM has grown, the category's relative share among the other open-end equity fund categories has dropped. In terms of assets, ELSS now stands at the fourth position among all open-end equity fund categories, with an AUM share of little more than 11 percent. As of December 2020, it stood at the third position, with an AUM share of 13 percent. This fall is despite the relentless bull-run witnessed during 2021.

The category saw a significant spike in redemptions, which started during the second half of 2020 when the markets started recovering after the COVID crash. Need-based redemptions appear to be the primary reason behind this. Another reason could be the fear of the market crashing again that made investors exit equity funds, including tax-saving ones.

However, the trend of net outflows from the category is likely to reverse as markets become resilient to the impact of successive COVID waves and investors make their tax-saving investments in equity to profit from the ongoing rally. As can be seen in the chart 'Tax-saving funds: Inflows and outflows', category inflows usually peak in March, as investors rush to make their tax-saving investment.