How to ride the ELSS underperformance

The recent lacklustre show has investors worried. Assess your funds on these metrics

 

Most schemes in the equity-linked savings scheme (ELSS) category have put up a disappointing show over the past year, underperforming the broader indices by a wide margin. The performance of systematic investment plans (SIPs) have been even more dismal, worrying retail investors who have been dutifully parking money every month in such schemes to cash in on the tax benefit under Section 80C.

It is true that the past year has been bumpy for most diversified equity funds. But near-term gyrations should not deter you from parking money in equity funds. Over a longer period, these funds are wealth builders and help you beat inflation.

That said, you cannot ignore the underperformance in ELSS funds altogether and need to take stock of your portfolio to weed out the consistent underperformers.

So, how can you re-jig your portfolio? Three parameters — rolling returns, risk-returns matrix and expense ratio — are generally used to pick funds across various categories. Here, we look at each of these parameters, specifically focussing on ELSS funds.

Consistency of performance

Though past performance may not be indicative of future returns, analysing how a fund fared in the past will give you a fair idea of its ability to outperform its benchmark and its peers. You can look at how the fund has performed consistently in the various bull, bear and volatile phases.

One way to assess the consistency of funds is through rolling returns. Rolling returns are the average point-to-point returns calculated for a given period.

The problem is that rolling returns data is not publicly available.

 

The colour chart gives you a clear picture on how ELSS schemes performed in different periods over the past 9 years. The chart is plotted using the three-year rolling returns calculated from the five-year NAV history in different periods. The chart ranks the performance of these funds across various periods.

Funds ranking 1-8 across many time periods are the relatively better-performing funds within the category —essentially within the top quartile across periods.

Risk-adjusted return

Investors should understand that funds may generate negative returns during volatile times. There are many statistical tools — standard deviationw, Sharpe ratio, beta, alpha and Sortino ratio — that are used to measure the risk and risk-adjusted returns generated by mutual funds . These ratios are readily available in mutual fund factsheets.

 

Sortino ratio measures the ability of a fund to generate higher returns with lower downside risks. So, a fund with a higher Sortino ratio indicates low probability of a loss.

Expense ratio

Mutual fund companies charge a certain per cent of their corpus to manage the fund. This is called expense ratio. A higher expense ratio will lower your NAV, and hence your returns. So, funds with lower expense ratios are generally preferable.

Direct plans that bypass distributors have a lower expense ratio, but only savvy investors should consider going direct. If you are a newbie, go with regular plans.w

The table shows the-top performing ELSS funds that rank high based on rolling returns, latest one year returns and Sortino ratio.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





Related

This article is closed for comments.
Please Email the Editor