Congratulations! If you are looking for the best ELSS funds, you have already made the decision to invest in ELSS tax saving funds under income tax section 80C this year. Wise decision, I would say. Let’s now identify the best ELSS Mutual Funds for 2017.
Before we get into finding the best ELSS funds, let’s go through a quick primer on ELSS.
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ELSS funds are like any mutual fund that pools your investments into equity markets. However, it stands apart from a regular mutual fund in one major way. ELSS funds carry a tax benefit on the amount invested under section 80C of Income Tax. Therefore you must lock-in your investment for three years.
- Surrogate route to direct stock markets
- Minimum investment in ELSS funds is Rs 500 per month
- Only 3-year lock-in period
- Tax benefits under 80C up to 1.5 lac
- The returns are tax-free too
- Highest expected returns.
A more detailed discussion on ELSS can be found here.
Best ELSS Tax Saving Mutual Funds for 2017
The choice of best or top Mutual Fund is not straight forward. Since past performance is not an indication of future performance, it is very difficult to identify any ‘best’ ELSS mutual fund. But data and analysis can surely help us find the best 3 or 4 ELSS funds. A good strategy is to split the investment amount among these 3 or 4 good tax saving mutual funds.
There is no single factor that can determine the top candidate. Therefore a methodical approach would help in finding the consistent outperformers. After all, each one of us is looking for a future outperformer. As the result of the analysis discussed in the later sections, the most promising ELSS Mutual Funds for 2017 are the following –
- DSP BlackRock Tax Saver Fund
- Birla Sun Life Tax Relief 96
- Reliance Tax Saver Fund
- Axis Long Term Equity Fund
- Franklin India Tax Shield Growth
I have come up with the following portfolio with top ELSS funds for 2017. In the following section, I will explain how I came up with this list.
ELSS Fund Portfolio Performance
This portfolio has generated annualized return of 25%+ in last 3 years. However, we cannot project future returns from the past. If we take a conservative estimate of 12% annualized return, a SIP of Rs 25,000 per month will help you build around Rs 2.3Cr in 20 years.
How much should I invest in ELSS funds?
Section 80C allows you to invest up to Rs 1.5L in tax saving instruments like ELSS, PPF or NSC. If you already have PF with your company, you can invest the remaining amount in ELSS.
One of the most frequently asked questions is whether I can invest more than 1.5L limit in ELSS. The answer is you can – but tax exemption applies only up to the 1. 5L limit. And the limit is for all instruments (ELSS, PPF, NSC or FDs) combined together.
SIP or lump sum?
Considering ELSS mutual funds are 100% equity funds, it is suggested to invest through SIP to avoid volatility in the stock markets.
How did I choose the best ELSS funds portfolio?
There are 41 Mutual Funds available under ELSS plan. It is indeed very difficult to decide which one to put your hard earned money in. The good thing is that unlike for investments in other mutual funds, investments in ELSS doesn’t require too much of advisory to select the best ELSS Fund. The goal is same for every investor – high returns in the medium term to long term. Since all of the ELSS funds invest in diversified equity and have a lock-in of 3 years, the selection criteria are very analytical.
We will follow the approach discussed by Ishan in his article “How Do I Choose a Mutual Fund” to select the best mutual fund for tax saving.
Step 1: Filter the ELSS mutual funds based on AMC, Age, and AUM
- AMC (top 15 only) – To avoid the risk, we will take only the top 15 AMCs.
- Age of the Fund (more than 5 years) – Again, the fund should be at least 5 years old to have proven the track record
- AUM of the Fund (higher than 1000 Cr) – AUM also indicates people’s trust in the fund. We will choose the funds with more than 1000 Cr of AUM.
After running the above filtering we arrive at a list of 11 ELSS Plans.
|Fund||Expense Ratio (%)||1-Year Return (%)||Net Assets (Cr)|
|HDFC Long Term Advantage Fund||2.28||30.26||1300.4|
|DSP BlackRock Tax Saver Fund||2.54||32.32||1906.77|
|L&T Tax Advantage Fund||2.12||30.13||1973.01|
|Franklin India Taxshield Fund||2.51||20.22||2657.39|
|Birla Sun Life Tax Relief 96||2.36||22.79||2779.54|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||2.3||25.85||4013.8|
|SBI Magnum Taxgain Scheme||2.01||21.73||5237.37|
|HDFC Taxsaver Fund||2.16||33.57||5800.56|
|Reliance Tax Saver (ELSS) Fund||1.99||29.57||6916.32|
|Axis Long Term Equity Fund||1.98||19.19||11490.74|
Step 2 – Filter the ELSS fund by Sharpe Ratio
Sharpe ratio is a measure of the returns given by the fund per unit of risk taken. Funds that have lower than 1 Sharpe ratio can be removed from the list as they are too risky for the returns they have given. Therefore out of the 11 ELSS Mutual Funds from the previous filtering, we are left with the best 6.
|Reliance Tax Saver (ELSS) Fund||1.06|
|L&T Tax Advantage Fund||1.09|
|Birla Sun Life Tax Relief 96||1.18|
|DSP BlackRock Tax Saver Fund||1.18|
|Axis Long Term Equity Fund||1.19|
|Franklin India Taxshield Fund||1.21|
Step 3 – Pick the ELSS Mutual Funds with most consistent returns
Now that we are left with just 6 ELSS mutual funds, we will sort them using 1 year, 3 years, 5 years and 10 years returns to select the consistently good performing funds. Clearly, the Reliance Tax Saver and DSP Blackrock Tax Saver are the most consistent ELSS funds. But what is also important to consider is the standard deviation and expense ratio. Standard deviation is a measure of volatility in the returns. Reliance Tax Saver has a pretty high standard deviation. Therefore, if you are comfortable with the high risk, you can keep Reliance Tax Saver in your list. Similarly, Axis has a very low standard deviation (low risk) and low expense ratio. If you want to go for a safer portfolio, keep Axis in your list.
Step 4 – Final Selection
The AUM of Axis Long Term Equity Fund has grown too high in last few years and it appears to have started underperforming because of its high AUM. Its AUM has swelled to 11K+ Crores now. It has also trailed in returns to the category in the last one year.
Therefore the final recommendation for ELSS Mutual Funds for saving taxes are:
PPF vs ELSS Mutual Funds
ELSS funds have the shortest lock-in period compared PPF that carries a maturity period of 15 years. For more details on various schemes under Article 80C, take a look at this blog post on Section 80C: click here to open in new tab.:.
PPF stands for Public Provident Fund – a fixed interest scheme in which Government decides the interest rates. Following table captures the primary difference between ELSS and PPF
|Criteria||Tax Saving MFs||PPF|
|Lock-in||3 years||15 years|
|Tax on Returns||No||No|
From the tax perspective, both have tax exemption under Section 80C of the Income Tax Act up to certain limit. The difference is mainly in risk, returns, and liquidity.
How to invest and redeem from ELSS mutual funds?
Purchasing a Portfolio
With the advent of online facilities, investing in mutual funds has become as simple as buying from Flipkart or Amazon. However, before you start investing, you need to go through a CKYC process. This is a one-time process and can be completed in few mins without any hassles. And yes, this can be completely paperless. Check this article to know more about CKYC: What is CKYC?
ELSS Lock in Period
We started with the premise that this portfolio is meant for the long-term, however, there will be a day when you might need to encash your portfolio for your needs. One good thing about mutual funds is that they are very liquid (you can sell anytime) compared to other investment options. When you redeem (sell) your mutual funds, the money is transferred to your bank account within a day or two. However, one important thing to note about ELSS mutual funds is that there is lock-in of 3 years. You cannot sell your ELSS funds before 3 years.
ELSS funds are one of the best ways to save tax. You can utilize your section 80C limit to invest in ELSS funds. We arrived with 3 of the best ELSS funds to build a tax-saving portfolio – and reviewed the performance of this portfolio. It is recommended to do a SIP considering ELSS funds are equity funds and carry high risk.