There are hundreds of mutual funds active in Indian securities markets. Out of those funds, ELSS, more popularly known as Tax saving mutual funds is the center of attraction among Indian retail investors, which we will be covering today in Samco Investor Education Series. With increasing reach of mutual funds in India and more information available to investors about capital markets, in recent times investors have started investing in tax saving mutual funds. Therefore it’s necessary to understand tax saving mutual funds in much detail.

Through this article readers will get to know,

  1. What is ELSS/Tax Saving Funds?
  2. Advantages & Disadvantages of ELSS
  3. How to evaluate any ELSS funds?
  4. Options for investing in ELSS category
  5. Top performing ELSS funds

 

1) What is ELSS/Tax saving mutual funds?

ELSS Funds stands for Equity Linked Saving Scheme where investors get the tax exemption on investing in ELSS under section 80C, Income Tax Act of 1961,  with the maximum limit of tax exemption on Rs 150,000. There are a few points which need to be kept in mind.

  1. First, ELSS comes with a lock-in period of 3 years.
  2. Second, the fund invests in equities, hence ELSS possess certain risk with them.
  3. Third, you can make an investment in the form of Mutual Fund investment, by paying lump sum money or SIP i.e. monthly installments.

 

2) Advantages & DISADVANTAGES of ELSS

Advantage:
  1. ELSS has a lock-in period of 3 years whereas other tax saving instruments like FD have a lock-in period of 5 years.
  2. Earnings through ELSS are taxed only at 10% of the gains.
  3. There is no maximum limit to investment.
  4. Funds are managed by experienced and qualified professionals, thereby eliminating the need of paying attention to minute by minute price movements in stocks.
Disadvantage:
  1. ELSS are comparatively risky when compared with PPF, PF, FD, etc.
  2. Data suggest that ELSS has given good returns only when it is held for more than 5 years. This actually makes people remain invested for a long period virtually blocking the cash  

 

3) How to evaluate any ELSS funds for investment?

ELSS investor could look out for the following parameters to assess the worth of the Fund for investment:

  1. Returns: Investors need to see the performance of the fund in the past. The time frame should be at least 5 years. Also, see if the performance of the fund is above the benchmark and compare it with the peer performance. If every parameter is in line then you can consider the fund for investment.
  2. Fund History: Look out for the past performance of the fund for at least 5-10 years.
  3. Expense ratio: Expense ratio highlights the money required to manage the expense of the fund. The lower the ratio is the better return investors would get. Therefore investors need to select a fund with a lower expense ratio.
  4. Financial Parameters: Explore the following parameters of a fund namely Standard Deviation, Sharpe ratio, Sortino ratio, Alpha and Beta. Higher standard deviation & beta tends to make funds riskier. Higher Sharpe ratio of a fund tends to give a higher return.

 

4) Options for investing in ELSS category:

  1. Growth Option: In case of growth option, investors don’t get dividends, rather dividends are further reinvested in the fund. This enhances the NAV of the fund. Such funds usually have the capacity to generate value for investors.
  2. Dividend Option: This option gives dividends to investors. After every dividend distribution, the NAV is adjusted.
  3. Dividend reinvestment option:  In this option, usually dividend is paid out to investors and investors have the option of returning the dividend back to the fund for reinvesting in the fund.

 

5) Top Performing ELSS funds:

List of Top 10 ELSS Fund with other critical details:

Axis Long Term Equity Fund: Axis long-term equity fund is managed by Axis Mutual Fund and it’s one of the largest assets under management. The fund invests in companies which can grow well in the time frame 3-5 years.

Fund Strategy: The fund invests in large-cap companies which have the potential to grow in the next 3-5 years.

Inception: 29th December 2009
Net Asset: 18,262 Cr. Rs.
Type: Open Ended
Exit Load: 0
Expense Ratio: 2.26%
Benchmark: S&P BSE 200 TRI
Performance
1 Year Return: 18.69%
3 Year Return: 12.96%
5 Year Return: 27.34%

Franklin India Taxshield: Franklin India Taxshield is one of the best ELSS available in the market. The fund performed well since its inception growing at a CAGR of 24%  

Fund Strategy: The fund invests in large-cap companies which have the potential to grow and has an attractive valuation.

Inception: 10th April 1999
Net Asset: 3,623 Cr. Rs.
Type: Open Ended
Exit Load: 0
Expense Ratio: 2.08%
Benchmark: NIFTY 500 TRI
Performance
1 Year Return: 9.03%
3 Year Return: 9.52%
5 Year Return: 21.90%

DSP BlackRock Tax Saver Fund: DSP BlackRock Tax Saver Fund has generated a 13.87% CAGR since inception.The fund focuses on large cap companies.

Fund Strategy: The fund has a bottom-up investment approach, with a strong focus on investment in good companies with an attractive valuation.

Inception: 18th January 2007
Net Asset: 4,218 Cr. Rs.
Type: Open Ended
Exit Load: 0
Expense Ratio: 2.10%
Benchmark: NIFTY 500 TRI
Performance
1 Year Return: 7.92%
3 Year Return: 12.90%
5 Year Return: 23.82%

Reliance Tax Saver Fund: Reliance Tax Saver Fund has generated CAGR of 14% since inception. The fund has a focus on mid-cap and small-cap companies.

Fund Strategy: The fund has a focus on small & mid-cap companies with good value and growth.

Inception: 21st September 2001
Net Asset: 10083 Cr. Rs.
Type: Open Ended
Exit Load: 0
Expense Ratio: 1.98%
Benchmark: S&P BSE 200 TRI
Performance
1 Year Return: -4.34%
3 Year Return: 7.01%
5 Year Return: 24.82%

ICICI Prudential Long Term Equity Fund: ICICI Prudential Long Term Fund has generated CAGR of 21% since inception. The fund has a focus on investing value attractive companies with growth potential across various market capitalization. The fund has outperformed its bench NIFTY 500 13 times in 15 years.

Fund Strategy: The fund has a focus on small & mid-cap companies with an attractive valuation.

Inception: 19th August 1999
Net Asset: 5,258 Cr. Rs.
Type: Open Ended
Exit Load: 0
Expense Ratio: 2.28%
Benchmark: NIFTY 500 TRI
Performance
1 Year Return: 16.00%
3 Year Return: 11.84%
5 Year Return: 23.12%

That covers in-depth information about Tax saving Mutual Funds. For more useful articles on mutual funds, trading, investing and market knowledge, visit our Investor Education section.

(Note: This content is for information purpose only. Avoid trading and investing based on the information given above. Before investing in stocks or mutual funds, please conduct proper due diligence)

Leave a Reply

Your email address will not be published. Required fields are marked *