Tax saving equity mutual funds are one of the best ways to save income tax. Also called Equity Linked Savings Schemes (ELSS), these funds primarily invest in equities and are riskier than fixed income-oriented tax savings instruments like Endowment Insurance Plans and Whole-Life Insurance plans and even tax savings bonds.
ELSS, however, offer the opportunity to earn much superior returns over the long-term just like diversified equity mutual funds. However, unlike regular equity mutual funds, ELSS have a lock-in period of three years and have a longer investment horizon than traditional diversified equity schemes.
The investment in ELSS schemes is tax deductible under section 80C just like life insurance and PPF investments. ELSS schemes are good for people who like to take some risk with their savings and earn higher returns than fixed income from tax-free bank FDs or tax-free post office deposits.
ELSS vs ULIPs
ELSS are typically compared to Unit Linked Insurance Plans (ULIPs) sold by insurance plans. Both are market linked investment schemes and as such short-term returns can be equally volatile in both the schemes. However, ELSS are a better option for investors with investment horizons of years or less. In contrast ULIPs require much more patience and good returns come only if you are willing to stay invested for 10 years or more.
The withdrawal of the tax break on ULIPs in the latest union budget has reignited the debate between ULIPs and ELSS.
Until now, there was no capital gains tax on ULIP proceeds on maturity. Now they will attract long-term capital gains tax just like equity mutual funds if the annual premium is more than Rs2.5 lakh or around Rs2,000 per month.
The latest change in tax regime has ended one of the biggest advantages of ULIPs over ELSS. This is especially true for high net worth investors (HNIs). As such, the mutual fund industry now expects a resurgence in the popularity of ELSS. After its success in the early 2000s, ELSS had lost out to ULIPs and diversified mutual funds.
The segment is now expected to get a fresh push by the mutual fund industry which is good for investors.
The savers or saving funds have more or less delivered on investor promises over the long-term in tandem with the movement in the broader equity market. According to ICRA Analytics MutualFundIndia, ELSS schemes have given annualised returns of 16.22 percent on average in the last 5 years.
In the same period, diversified equity schemes have delivered annualised returns of 15.64 percent while index funds or equity ETFs have delivered 15.23 percent return per annum. So tax savers schemes have done slightly better than their other equity cousins in the recent past.
Which ELSS Funds to Invest in now
Currently, there are around 40 tax saver or ELSS mutual funds and most fund houses offer at least one ELSS scheme while big ones have more than one scheme in their bouquet.
This makes it a tough choice given that not all schemes do well all the time. As the market changes, so does the relative performance of various equity schemes.
We, at 30Stades, have made the task easier for you. Here is the list of ten best balanced funds rights based on their risk-adjusted performance in the last five-years.
Axis Long Term Equity Fund tops the charts with 5-year returns of 17.8 percent per annum and sharpe ratio of 0.16 percent. With assets under management of around Rs 25,500 crore, it is the biggest and one of the most popular tax-savers equity funds. The fund continues to do well in the short-term as well and is up 31 percent in the last six-months and has delivered 27.4 percent returns in the last one-year. At 1.61 percent, its expense ratio is lower than category average of around 2.2 per cent.
Next is Canara Robeco Equity Tax Saver Fund that has delivered 18.9 percent returns in the last 5 years and is up 35.5 percent in the last six-months. However, its expense ratio at 2.31 percent is a little on the higher side.
ICICI Prudential Long Term Equity Fund (Tax Savings) is ranked third with 5 year returns of 14.8 percent and one-year returns of 36.4 percent. The Fund also scores on expense ratio.
Other funds with good returns and low expense ratio include Mirae Asset Tax Saver Fund, DSP Tax Saver Fund and SBI Long-Term Equity Fund. See the table below:
It's best to follow a portfolio approach and divide your corpus in 3-4 different balanced funds instead of putting all your money in the top ranked fund.
How were funds ranked?
Our analysis only includes funds with assets under management (AUM) of Rs 100 crore or more currently. Data has been sourced from ICRA Analytics Mutual Fund India.
To arrive at the list, we analysed the returns of all 40 ELSS funds that meet the AUM threshold. The returns were compared on six-months, 1-year, 3-year, 5-year basis and since the fund’s inception.
In the analysis we also looked at funds expense ratio, the portfolio concentration ratio, standard deviation and the Sharpe ratio. This gave us a true picture of the fund performance as well as its risk profile.
The final rank is the sum of ranks on all parameters – short and long-term returns, the risk factors and the expense ratio.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
Also Read: Tax planning: 6 ways to save tax this year