Top 5 Best ELSS Mutual Fund Schemes for Tax saving & Wealth Creation

ELSS or Equity Linked Savings Scheme of Mutual Funds are one of the best tax saving cum long-term wealth creation investment tools. Your investments in ELSS schemes are eligible for income tax deduction under Section 80c.

Tax saving is one of the most important investment objectives of many investors. In the next few days, the current Financial Year (2017-18) is going to end and the new one (FY 2018-19) will begin. So, when is the right time to start planning your taxes? Is it good to wait till next IT declaration season or March (2019) for tax planning?

You may kick-start your tax planning from this April itself. Don’t wait till March 2019!

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.,)
• 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 Mutual Fund Schemes for FY 2018-19

As you may be aware that we have been witnessing a few major changes in the mutual fund industry namely : SEBI’s re-categorization’ norms, 10% LTCG tax on Equity mutual funds, changes in Expense ratios of mutual fund schemes etc.,

All these years, SEBI/AMFI have been allowing multiple funds under same fund categories from same AMCs, in order to bring the desired uniformity across mutual funds and to standardize the various MF scheme categories, the SEBI through Mutual Fund Advisory Committee has issued new guidelines on ‘new Categorization of Mutual Fund Schemes.’

As per these new norms, only one scheme per category would be permitted. ELSS Tax saving funds are one of the 11 categories (under Equity Funds) proposed by the SEBI. The mutual fund houses have already started implementing these re-categorization rules. (Related Article : ‘Mutual Fund Schemes Categorization and Rationalization – Types of MF Schemes | SEBI’s Latest Guidelines‘)

To meet these new guidelines all the mutual fund houses may have to merge, modify or close their available schemes. This is the main reason for not publishing the ‘Best Equity Mutual Funds 2018’ article.

As per my last year’s analysis, below are the top performing Tax saving mutual funds for FY 2017-18 ;

• DSP Blackrock Tax Saver Fund
• Birla Sunlife Tax Plan
• Birla Sun life Tax Relief ’96
• Franklin India Taxshield Fund
• Axis Long Term Equity Fund

Due to SEB’s new norms, we can expect Birla Sulife Tax Plan to be merged into Birla Tax Relief ’96 Fund. Hence, I am replacing this fund with TATA India Tax Savings Fund in this year’s best ELSS Funds list.

Below are the top performing & Best Tax saving mutual funds for 2018 – 2019 and their lump sum investment Returns; (Returns are for Regular plans and Growth option)

• Birla Sun life Tax Relief ’96
• DSP Blackrock Tax Saver Fund
• Axis Long Term Equity Fund
• TATA India Tax Savings Fund
• Franklin India Taxshield 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
• Beta
• Alpha
• 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 as well;

(Source : Valueresearchonline.com)

 Best ELSS Funds & Analysis :

• Birla Sun life Tax Relief ’96 : This fund is one of the oldest ELSS Funds and has been a consistent performer for the last few years. We can consider this fund as a typical Multi-cap one with a higher allocation to Mid-cap stocks. The fund’s portfolio has stocks from these top 3 sectors – Auto, Banking & Pharmaceuticals. The current portfolio has an allocation of around 52% to Mid & Small cap stocks and around 40% in large-cap stocks. The fund management team has remained very stable since 2006. The winning investment strategy of this fund has been its ability to pick quality mid-caps for the long haul. The returns generated by this fund during last 5 & 10 years are 22% and 12% respectively.
• DSP Blackrock Tax Saver Fund :  This fund has outperformed its benchmark (Nifty 500) in eight out of nine years since launch and its peers in seven of those years. DSP Tax saver fund does not follow any particular investment style as such but sticks to ‘blended’ model.  The fund has been a large-cap oriented in the last five years with an allocation of around 69% to large cap stocks and around 24% to mid-cap stocks. The top sectors chosen by this ELSS fund are Banking, Oil & gas and Auto. The fund has seen a change in fund manager during 2015-16 and since then the management team has been bettering more on Large cap stocks. We need to keep a close watch on this fund’s performance for the next couple of years. The returns generated by this fund during last 5 & 10 years are 20% and 14% respectively.
• Axis Long Term Equity Fund : This is one of the largest Equity Funds (AUM wise) in India. The fund’s portfolio typically invests in 50 to 70% in large cap stocks with the remaining portion of portfolio invested in small & mid-cap stocks. The current allocation to large caps is around 63%. The top three sectors that have been invested in are – Banking, Auto & Chemicals. It witnessed a slowdown in performance in 2016 but has recovered in 2017. This can be a good example as to why one should not churn his/her MF portfolio frequently and advisable to give enough time for the consistent performers before dropping them from their investment list. The returns generated by this fund during last 5 are around 23%. But, let’s not forget the fact that this fund is yet to be tested in a severe market meltdown, being a ‘late entrant’ (year of launch – 2009).
• TATA India Tax Savings Fund : This fund follows a typical Multi-cap approach. The current portfolio allocation is around 57% in Large cap stocks, 32% in mid-cap stocks and 10% in Small cap stocks. The top three sectors that have been invested in are – Banking, Cement & Oil/Gas. Historically, this fund has been good at containing losses during bear phases such as 2001, 2008 and 2011. It has also performed well during the current bull phase of the market. This fund can be considered by the investors with good risk appetite. The returns generated by this fund during last 5 & 10 years are 21% and 13% respectively.
• Franklin India Taxshield Fund : I believe that this ELSS fund is a right choice for a ‘conservative’ investor.  It has been maintaining a large-cap bias amid different market phases. Its ‘ability to contain downside‘ and ‘consistency‘ of returns are its main features. Advisable not to expect abnormal returns from this fund even during a bull phase. There has been a change in fund manager during 2016-17. The returns from this fund has been low compared to its benchmark and category for the last couple of years. We need to keep a track of its performance for the next couple of years.  The top three sectors that have been invested in are – Banking, Auto & Oil/Gas. The returns generated by this fund during last 5 & 10 years are 18% and 14% respectively.

Let’s also keep an eye on L&T Tax Advantage Fund, IDFC Tax Advantage (ELSS) Fund & Principal Tax Savings Fund

My Investments in ELSS Funds :

Personally, I have been investing in Axis Long Term Equity fund and my spouse invests in Birla Tax Relief ’96 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.
• Direct Plan or Regular plan? – There is no doubt that the direct plans of ELSS MF Schemes outperform their respective Regular plans. Hence, you may consider investing in Direct plans, in case you have the required expertise, skills and time to pick the right ELSS fund for your long-term goals.
• 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 Birla Tax Relief, Axis LTE or TATA Tax savings Scheme typically follow multi-cap approach. (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.
• 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’.
• 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? | Post Budget (2018) LTCG Tax proposal on Equity Mutual Funds & Shares.’

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 5-10 years.

Have you invested in any of the above Best ELSS mutual funds? Do you also believe that ‘Mutual Fund ELSS’ is a good tax saving instrument? Kindly share your views and comments.

Continue reading :

• Budget 2018 LTCG Tax on Equity Mutual Funds & Important Implications
• Mutual Fund Capital Gains Taxation rules for FY 2018-19 / AY 2019-20
• Is Lock-in period for Investments applicable on unfortunate demise of the Investor?
• List of important Tax Deductions for FY 2018-19 | How to save tax for AY 2019-20?
• Why your Best Mutual Fund Schemes may not remain as ‘the best’? | SEBI’s new re-classification rules

(References : valuereasearchonline, moneycontrol, freefincal & morningstar portals)

( Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post published on 27-March-2018)