Why Are ELSS Mutual Funds Showing Negative Returns Despite a Positive BSE Sensex?
Investors often question why their ELSS (Equity Linked Saving Schemes) mutual fund returns are negative when the overall stock market, as represented by the BSE Sensex, is showing positive growth. This article aims to clarify this confusion and provide insights into the factors contributing to such discrepancies.
Understanding ELSS Mutual Funds
ELSS are a type of mutual fund that invests primarily in equity or equity-related instruments. The primary objective of ELSS is to provide tax benefits under Section 80C of the Income Tax Act, 1961, while also aiming for potential capital appreciation over the long term. This makes them appealing for investors looking to grow their wealth and avail tax benefits.
The Role of the BSE Sensex in the Market
The BSE Sensex is a stock market index that represents the state of the Indian stock market. It is composed of the 30 largest and most actively traded stocks in the Bombay Stock Exchange. While the Sensex is a broad indicator, individual mutual funds such as ELSS track and invest in a more specialized subset of stocks. This specialization means that mutual fund returns can differ significantly from the overall market index.
Factors Contributing to Negative Returns
There are several reasons why an ELSS mutual fund might show negative returns while the BSE Sensex is showing positive growth:
Selectivity of Investments: ELSS funds invest in a narrower range of stocks compared to the Sensex, which includes a broader selection of companies. An ELSS fund’s performance is heavily influenced by the specific stocks it has chosen. Market Corrections: The investor mentioned a correction in the stock market from February 2018. Market corrections occur when stock prices fall significantly over a short period. Even if the overall market recovers later, individual stocks within an ELSS fund may continue to decline, leading to negative returns. Performance of Underlying Stocks: ELSS funds typically invest in a mix of large-cap, mid-cap, and small-cap stocks. The performance of these underlying stocks can vary widely, and some stocks may underperform, dragging down the fund’s overall return. Timing and Rebalancing: The timing of investments and the rebalancing of the fund can also affect returns. If the fund is not re-balanced appropriately, it may hold underperforming stocks for a prolonged period, leading to negative returns.Comparing Returns with Category
To better understand the performance of your ELSS mutual fund, it is crucial to compare it with the category it belongs to. ELSS funds are typically divided into various categories based on investment parameters such as size, sector, and style. It is advisable to gauge your fund’s performance within its peer group to determine if it is performing competitively.
Investment Considerations
Investors should consider the following when evaluating the performance of their ELSS mutual funds:
Market Trends: Understand the broader market trends and compare the fund’s performance with the corresponding benchmark. Portfolio Analysis: Review the fund’s portfolio to identify the composition of stocks and their performance. This can provide insights into the reasons for negative returns. Long-term Perspective: ELSS funds are generally designed for long-term investment. Short-term fluctuations should be viewed in the context of their overall performance over a longer period. Professional Advice: Consider seeking advice from financial experts who can provide further insights and guidance based on your individual circumstances.Conclusion
While the BSE Sensex may show positive growth, individual ELSS mutual funds can still exhibit negative returns. This article has explained the factors contributing to such discrepancies and provided insights into how to better understand and evaluate the performance of ELSS funds.
Investors are encouraged to stay informed about market trends, regularly review their investments, and seek professional advice to make informed decisions.