For salaried employees, the deadline to submit the provisional tax saving investment proofs is fast approaching.
Most of the employers collect the documents in the month of January. During this period investors/employees who have not commenced their tax planning generally rush to buy life insurance policies or some other tax saving investments.
There is one tax saving option which I believe can be your best investment avenue both in terms of tax benefit and long -term wealth creation (provided you are ready to take RISK). I am talking about ELSS (Equity Linked Savings Schemes) Mutual Funds.
ELSS funds are best suited for self-employed individuals too. 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.,)
In this post, let us discuss – Why ELSS Mutual Funds can be your preferred tax saving option? Which are the best ELSS Mutual Funds 2020? Which are the top performing Tax Saving Mutual Fund Schemes to invest in 2020 and beyond? Which ELSS Fund is best to invest in FY 2020-21? What are the best ELSS SIP Funds?…
Why to invest in ELSS Mutual 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.
- ELSS Mutual Funds are one of the best tax saving options under Section 80c. Infact, ELSS MF scheme is the only pure investment option under Section 80C through which investors can take exposure to equity markets.
- 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).
- You can start a SIP in ELSS MF with a minimum investment (as low as Rs 500). Unlike an life insurance, you don’t have to commit multi year investments.
- If you have invested in any of the conventional tax saving instruments, then you must have noticed that they don’t show the securities in which they have invested in. But, this is not the case with ELSS mutual funds. You can easily check the stocks and sectors in which they have invested in and can guide your investments according to that. ELSS Funds are fully transparent.
Best Tax Saving Mutual Funds 2019
In my last review of ELSS Funds, I have listed below ELSS mutual funds that can be considered for investment;
- Aditya Birla Tax Relief ’96 Fund
- Axis Long Term Equity Fund
- DSP Blackrock Tax Saver Fund
- Franklin India Taxshield Fund
- Invesco India Tax Plan
Let us now see if these funds have again made it to the list of this year’s Best ELSS Mutual Funds to invest in 2020-21..
Comparison of Top Performing ELSS Funds
When we are making a comparison of equity mutual funds, it is ideal to track not only the investment returns generated by these funds but also the ‘risk ratios’ pertaining to them.
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-graphic gives us an idea about ideal ratio/percentage that can be considered while selecting a mutual fund scheme;
Related Articles :
- How to select the right and best Mutual Fund Scheme based on the Measures of Volatility?
- What are Mutual Fund Upside / Downside Capture Ratios? | How to use them in MF Performance Analysis?
I have considered the Returns and Risk ratios of the below funds for my ‘Best ELSS Mutual Funds 2020’ review.
There are around 37 ELSS Mutual Fund Schemes that are available now. The category average returns are around 8.7% in 5 years and 11% in the last 10 years.
The risk stats of these funds are as below;
Top 5 Best ELSS Mutual Funds 2020-21
In my opinion, below are the 5 best ELSS Mutual Funds to invest for tax saving and long term wealth creation;
- Axis Long Term Equity Fund
- Invesco India Tax Plan
- Birla Sun life Tax Relief ’96 Fund
- DSP Blackrock Tax Saver Fund
- TATA India Tax Savings Fund
The only change that I made to the list when compared to last year’s is – I have included TATA India Savings Fund and removed Franklin India Taxshield Fund.
In case, you have been investing in Franklin Taxshield Fund, you may continue with your investment plan.
Axis Long Term Equity Fund
- Most popular scheme of the ELSS category with Rs. 19,200 crore worth of assets under management.
- Follows a focused investment style with current investment in a total of 34 stocks. As for asset allocation, it follows a large cap (68%) oriented style, but a considerable allocation is also in the mid/small caps (30%).
- A great performer in the market downturn and was one of the few equity schemes to give positive returns in the current volatile market. The fund has given around 18% returns in the last one year, whereas the average category returns have been around 9%.
- Axis LTE has a very good Capture Ratio. (Capture ratio is calculated as Upside Ratio divided by Downside ratio. For example, a fund with an upside-capture ratio of 100% and a downside ratio of 80% would have an upside/downside ratio of 1.25. Any ratio above 1 means that a fund does a good job of capturing gains during bull phases while lessening the impact of bear markets.)
Invesco India Tax Plan
- One of the best schemes provided by Invesco Mutual Funds and has shown a decent performance since its inception on Dec 29, 2006.
- The fund generated around 13.6% (CAGR) returns in the last 10 years and is ranked at no.1 in terms of performance.
- Its standard deviation is one the lowest under ELSS fund category.
- However, there has been a change of Fund manager recently. If you have been investing in this fund, you may continue with your SIPs/investments. But, keep a track of the Fund’s performance. In case, you are looking to add an ELSS Fund to your portfolio then you may skip this one for the time-being.
Birla Sun life Tax Relief ’96 Fund
- One of the oldest and most consistent schemes of the mutual fund market. Since inception (1996), it has provided an annual average return of more than 24%.
- It follows a mid cap and large cap-oriented style of investing with a mildly diversified portfolio of 40+ stocks.
- The fund has around 56% allocation to mid/small cap stocks. This could be one of the major reasons for its under-performance in the last couple of years.
- Also, it has a very high portfolio turnover ratio which means the stock selling and picking is very frequent, making this scheme a bit aggressive.
- An existing investor as well as a new investor can consider investing in this fund for long-term.
DSP Blackrock Tax Saver Fund
- A consistent long-term performer, with a track record of beating the benchmark and category returns at every cycle.
- Follows a diversified portfolio and as of now has investments in 60+ stocks picked across different sectors.
- Changes the sector allocation as per the market trends to ensure that investors get the best value for their money in the long-term.
- The fund primarily follows large-cap orientation and has an allocation of around 77% to large cap stocks.
TATA India Tax Savings Fund
- The returns generated by TATA Tax savings fund have been fantastic over the last decade or so. But, it falls under the category of ‘high risk – high reward’ type of fund. The standard deviation for this fund is the highest among the above listed funds.
- The fund has a current allocation of around 80% to large-cap stocks.
- It’s portfolio turnover ratio is around 30%, one of the least under ELSS category. The Category average turnover ratio is 60.39%.
My ELSS Investments :
Personally, I have been investing in Axis Long Term Equity fund and my spouse invests in Birla Tax Relief ’96 Fund & Franklin Tax shield (new addition to her MF Portfolio).
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.
- 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 / TATA Tax Saving Fund 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.
- Can I invest in Joint names? – Yes, investments in ELSS funds can be held in joint-names. But, the first account holder (primary) can only claim tax benefits u/s 80c.
- ULIPs Vs ELSS, which is a better investment option? – You may kindly go through my article on this topic @ ‘Mutual Funds Vs ULIPs – Which is better?’
Is Lock-in period for ELSS Investments applicable on unfortunate demise of the Investor?
- ELSS mutual funds have a lock-in period of 3 years. In the event of death of the investor, the nominee or the legal heir can withdraw the amount, only 1 year after the date of allotment of units to the deceased (original investor / unit-holder).
- For example : If the investor dies eight months after purchasing the units, the nominee has to wait for at least four more months to be able to sell the units (if he/she wants to redeem..).
- Kindly note that nominee can get the units transferred to him/her much earlier but can’t sell those until 1 year is over. Essentially, the lock-in period goes down from 3 years to 1 year in the event of demise of the original investor. This information can be found in any of the ELSS funds ‘scheme information documents’.
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.
Kindly note that the above list of top & best ELSS mutual funds 2020 is not an exhaustive one. Mutual funds’ returns are not guaranteed, their values/returns change frequently and past performance may not be repeated. MFs are subject to various market risks.
Data Source & references : Valueresearchonline, Moneycontrol, Morningstar, Freefincal & The Economictimes) (Post first published on 10- October-2019)