Tax saving is one of the most important investment objectives of many investors. In another 10 days the current Financial Year ends and the new one begins. So, when is the right time to start planning your taxes? Is it good to wait till next IT declaration season or March for tax planning?
You may kick-start your tax planning from this April itself. Don’t wait till March 2018!
And, which is the best available investment option for tax saving cum long-term wealth accumulation in Equity products?
I believe that ELSS (Equity Linked Savings Scheme) is one of the best tax saving options that we currently have in the financial market.
Why ELSS Funds?
- ELSS Tax saving mutual funds come with a lock-in period of three years; the lowest among all the tax saving options that are available under Section 80C. (PPF’s lock-in period is 15 years, Tax saving Bank Fixed Deposit’s is 5 years, National Saving Certificate’s is 5 years etc.,)
- ELSS falls under EEE tax rule(Exempt-Exempt-Exempt). No taxes are applicable during Contribution-Accumulation-Withdrawal phases. The Employee Provident Fund and the Public Provident Fund are the only other investment options that enjoy the EEE tax treatment. (Read : ‘Tax Treatment of various Financial Investments‘)
- There is no upper limit for investment in ELSS but the maximum tax benefit is limited to Rs 1.5 lakh under Section 80C.
- Investing in ELSS funds can give you a better chance to get better inflation adjusted returns (of course higher returns may generally associate with higher risk profile).
Top 5 Best ELSS Funds to invest in FY 2017-18
There are around 111 ELSS Mutual Fund Schemes and the average category returns for the last 5 years is around 12%. Below are the top performing Tax saving mutual funds and their lump sum investment Returns; (Returns are for Regular plans and Growth option)
- DSP Blackrock Tax Saver Fund
- Birla Sunlife Tax Plan
- Birla Sun life Tax Relief ’96
- Franklin India Taxshield Fund
- Axis Long Term Equity Fund
Below are the best ELSS Funds and their monthly SIP Returns ;
Best ELSS Mutual Fund Schemes & Risk Statistics
Above data gives us information mainly on past Returns that were generated by these top performing ELSS mutual funds. Besides investment returns, it is equally important that we need to look at the Risk Stats of these Funds.
The volatility of returns generated by a mutual fund scheme can be measured by some important risk ratios like;
- Standard Deviation
- Sharpe Ratio
- R-Squared Ratio
- Upside & Downside Ratios
Below info-graph gives us an idea about ideal ratio/percentage that can be considered while selecting a mutual fund scheme;
I have shortlisted the above listed best ELSS Funds based on these measures of volatility;
(Source : Valueresearchonline.com)
Best ELSS Funds & Analysis :
- DSP Blackrock Tax Saver Fund : This fund has invested its corpus primarily in stocks that belong to Banking, Oil & Gas and Auto sectors. Almost 70% of the fund’s corpus has been invested in Large cap stocks and around 20% in Mid-cap Company Stocks. The returns generated by this fund during last 5 year and 10 year period are 20.6% and 15.6% respectively.
- Birla Sunlife Tax Plan : The top sectors chosen by this ELSS fund are Auto, Banking and Pharmaceuticals. You can consider this fund as a typical Mid-cap oriented fund, as around 57% of its fund corpus has been allocated to mid & small cap stocks. The returns generated by this fund during last 5 and 10 years are 19% and 12% respectively.
- Birla Sun life Tax Relief ’96 : The fund’s portfolio has stocks from these top 3 sectors – Banking, Auto & Pharmaceuticals. The portfolio has higher allocation (around 57%) to Mid & Small cap stocks. This fund generally follows multi-cap strategy. The returns generated by this fund during last 5 & 10 years are 20.1% and 12.6% respectively.
- Franklin India Taxshield Fund : Banking, Auto and Technology sectors have been given importance by this fund in its portfolio allocation. Based on its portfolio allocation, we can consider this fund as a typical Large cap oriented fund. Around 80% of the fund corpus is in Large Cap Stocks. This fund has been one of the most consistent ELSS funds for the last many years.
- Axis Long Term Equity Fund : The fund’s performance has not been up to the mark in this Financial year (2016-17). But, may be it is too early to drop this fund from the top ELSS Funds list. Let’s give it some more time…! The fund is still one of the best consistent performers during the last 5 year period. Banking, Auto and Engineering are the top 3 sectors in this Fund’s portfolio.
You may also track / consider Tata Tax Savings Fund and ICICI Long Term Equity Fund.
FAQs on ELSS Funds
- My Section 80C bucket is full, should I still invest in an ELSS Fund? – You may consider investing in other mutual fund categories based on your investment objectives and time-frame. (Read : ‘Best Equity Mutual Fund Schemes – 2017‘)
- What is the best way to invest in ELSS – Lump sum or SIP mode? – There is no right or wrong answer. For the sake of convenience, I prefer 2 to 4 lump sum installments in a FY instead of monthly SIPs. Let’s understand the fact that timing the market is next to impossible. If you do not have the time to track the markets, it is perfectly ok to create a SIP in an ELSS fund. But, do note that units allotted under each SIP are locked for 3 years. (Read : SIP Vs Lump sum investment!)
- Dividend or Growth option, which is better for ELSS investment? – It is advisable to make investments in ELSS Schemes for long-term goals, so Growth option is better than dividend for long-term wealth accumulation.
- Are ELSS funds also Multi-cap funds? – We need to look at Funds’ Portfolio allocations to consider them as Large cap or mid-cap or multi-cap oriented funds. As mentioned in the above analysis, funds like DSP Tax saver / Franklin Tax Saver have high portfolio allocations to Large Cap Stocks. (Do note that Portfolio allocations can change over a period of time depending on the market cycles / Fund’s investment strategy.)
- Should I invest in Multiple ELSS Funds? – If you have already made investments in an ELSS fund, you may continue making additional investments in the same fund. But, do track its performance at least once in a year.
Kindly note that ‘Tax saving’ is just one aspect of ELSS investments. Wealth creation should also be an equally important objective. The key to equity investment is to remain invested for a sufficiently long time horizon of at least 5-7 years.
(Featured Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (References : moneycontrol.com, valueresearchonline.com, freefincal.com, morningstar.in) (Post first published on : 21-March-2017)
(Kindly note that Mutual Funds are subject to market risks and past performance may or may not be repeated.)