Equity-Linked Saving Schemes (ELSS) have gained popularity among investors seeking tax-saving investment options while also aiming for wealth creation. These are diversified equity mutual funds that invest most of their assets in equities, and they come with a lock-in period of three years. Value-driven ELSS funds focus on investing in undervalued stocks with strong fundamentals and growth potential. They work on the principles of value investing. Understanding the impact of market trends on these value-oriented funds is crucial for investors looking to maximize their returns while minimizing risks. Read on to find out.
What are value-driven ELSS funds?
Value-driven ELSS funds are a category of tax-saving mutual funds that invest in stocks considered undervalued by the market. They work based on the principle of value investing. Fund managers of these schemes follow a value investment approach, identifying companies with strong fundamentals, healthy financials, and a competitive advantage in their respective industries. These companies are often trading at a discount to their intrinsic value, providing an opportunity for investors to benefit from potential capital appreciation over time. The idea here is that value investors think these stocks’ prices will eventually reach their intrinsic value.
Impact of market trends on value-driven ELSS funds
In a bullish market, stock prices generally rise due to positive investor sentiment, high corporate earnings, and favourable macroeconomic factors. During such times, value-driven ELSS funds may underperform their growth-oriented counterparts, as investors tend to chase high-growth stocks with high price-to-earnings ratios. But the key is in understanding that value investing often long-term.
During a bearish market, stock prices decline due to negative sentiment, reduced corporate earnings, and unfavourable macroeconomic conditions. In these situations, value-driven ELSS funds may outperform their growth-oriented peers, as undervalued stocks with strong fundamentals generally fare better in a falling market. These funds can act as a defense for your portfolio in testing times.
Market cycles and sector rotation
Market cycles and sector rotation can significantly impact the performance of value-driven ELSS funds. As different sectors move in and out of favour, fund managers must continually adapt their investment strategies to identify undervalued stocks in sectors with strong growth potential. This active management approach can lead to varying degrees of success, depending on the fund manager’s ability to predict market trends and identify value opportunities.
Changes in interest rates can indirectly impact value-driven ELSS funds. In a rising interest rate environment, high-growth stocks may face pressure due to increased borrowing costs, which could lead investors to shift their focus towards undervalued stocks with better debt management and solid fundamentals. Conversely, in a falling interest rate environment, growth stocks may outperform, resulting in a temporary underperformance of value funds.
Value-driven ELSS funds can be an excellent addition to an investor’s tax-saving portfolio, offering potential capital appreciation and tax benefits. Understanding the impact of market trends on these funds is essential for making informed investment decisions and managing risks effectively. By adopting a long-term investment horizon, diversifying your portfolio, and regularly reviewing your investments, you can maximize your returns from value-driven ELSS funds in various market conditions.