Is long-term close-ended ELSS NFO for you?

As markets are soaring high and more and more people are getting attracted towards mutual funds. To encash this opportunity, many fund houses are coming out with new fund offer (NFO). Currently, there are six NFO open for subscription. Out of which three are in the tax savings category. That is an investment of up to Rs 1.5 lakh in these funds can earn a tax break under the Section 80C of the Income Tax Act.

What is interesting to note is that out of these three ELSS two are closed-ended and have maturity period of 10 years or your investment will have a lock-in period of 10 years. ELSS by their design are long-term investment and have a compulsory lock-in of three years. So, what is the need of extending that period by seven years and how is it going to improve returns?

One of the reasons given for the longer lock-in period is that it allows fund managers to take long term calls without worrying about redemption and churning of the portfolio to improve short-term performance of say, one year. The empirical analysis, however, shows that closed-ended funds have not outperformed the open-ended fund in the same category, in a similar time frame.

Therefore, we do not find any merit in investing in the current closed-ended ELSS with such a long-term lock-in period. Moreover, there are other products under the same section of 80C that have long-term lock-in period and are less risky. Another important factor is that closed-ended fund requires lumpsum investment, criteria which might pose liquidity problem for some of our investors. Therefore, if you want to invest in ELSS, it is better to invest in funds that have a good track record and good return potential.