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Best ELSS Mutual funds – Top 10 Tax Saving Mutual Funds

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For any investor, tax planning is a crucial part of their financial planning. Section 80C of the Income Tax Act offers investors the option to claim deductions from their taxable income through investments in certain schemes. Equity Linked Savings Scheme is one such tax saving mutual funds option.

  1. What are ELSS Funds?
  2. Who should invest in ELSS Funds?
  3. Advantages of ELSS Funds
  4. Disadvantages of ELSS Funds
  5. Options for Investing in ELSS Funds
  6. How to evaluate ELSS Funds
  7. Top 10 ELSS Funds
  8. Conclusion

 

1. What are ELSS Funds?

ELSS, as the name suggests, are equity-based mutual funds. These are the only set of mutual funds that help you avail tax deductions. These mutual funds come in with a lock-in period of 3 years. The investment route can be either lump sum investment or an SIP. The monthly investment could be as low as Rs. 500 and there is no maximum limit.

2. Who should invest in ELSS Funds?

ELSS funds are chosen by investors who are willing to take risks as these investments are equity oriented. Since there is a risk of volatility, it is advised that you invest for a longer duration as compared to the lock-in period of 3 years.

People nearing their retirement could opt for other tax savings investments like PPF or NSC as they are less volatile. However, people who have just started their career and can invest for a long period of time can opt for the more riskier ELSS funds which would give higher returns compared to others.

3. Advantages of ELSS Funds

1. The lock-in of 3 years is considerably less as compared to other close-ended mutual funds.

2. These mutual funds usually have the potential of earning higher returns compared to other tax saving instruments like PPF or NPS.

3. Earnings are taxed only at 10% of the gains.

4. There is no maximum limit to invest.

5. As an investor, you are not required to have extensive knowledge of the markets in order to invest in these funds. The funds you invest in are run by expert and experienced fund managers who are qualified to handle your investment.

4. Disadvantages of ELSS Funds

a) ELSS is not completely risk averse like other tax saving instruments like PPF. Their risk profile is similar to any equity oriented mutual fund scheme. It is just that these provide tax deduction benefits.

b) ELSS are shown to have delivered good returns on if invested for more than 5 years. So it is advisable that an investor must enter into equity (or ELSS) only if the holding period is more than 5 years, and that also with proper asset allocation.

c) Most mutual funds won’t accept investments from people living in Canada and the US.

5. Options for Investing in ELSS Funds

a) Growth option

One option for investment in ELSS is the growth option- where the holder will not get any benefits in the form of dividends. The investor shall only receive the gains at the end of the tenure. This will help appreciate the total NAV and thus multiply the gains. The only caveat being since these returns would be subject to market conditions, it may work in the investor’s favor or maybe completely bad but it is possible that the profits might be great.

b) Dividend Option

In this option, the holder gets timely benefits in form of dividends which are completely tax-free.

c) Dividend Reinvestments option 

This is an option wherein the investor gets the option of giving back the dividends received in order to add to the NAV. It is a good option if the market has been performing well and is likely to continue the same way.

6. How to evaluate ELSS Funds

a) Fund Returns

You need to look at fund’s recent performance for a minimum of 5 years before investing in that particular fund. Choose funds which perform better than the benchmark and other similar funds in the same time period.

b) Fund History

Choose fund houses which have performed consistently over a long period of time say 5-10 years.

c) Expense ratio

It shows how much of your invested amount is being used to manage expenses of the fund. A lower expense ratio means higher take-home returns. Choose a  fund with a lower expense ratio which can give you superior performance. 

d) Financial parameters

Consider various parameters like Standard Deviation, Sharpe ratio, Sortino ratio, Alpha and Beta to analyze the performance of a fund. A fund having a higher Standard deviation and beta is riskier than a fund having lower deviation and beta. Choose funds having a higher Sharpe ratio as they give you more returns for each additional risk undertaken.

7. Top 10 ELSS Funds

While selecting a fund, you need to analyze different parameters and then invest in a suitable one. Also, investing depends on an individual’s financial goals, investment horizon, and risk appetite.

The following table represents the top 10 performing ELSS funds based on the past 3 years. Investors may look at different parameters like returns of 1 year or 5 years, or different financial parameters.

 3 year5 year
Reliance Tax Saver Fund 9.2% 21.12%
DSP BlackRock Tax Saver Fund 14.3%20.7%
Axis Long Term Equity Fund 14.5% 24.6%
Aditya Birla Sun Life Tax Relief 96 15.9%23.5%
SBI Magnum Taxgain Scheme 8.7% 17.4%
ICICI Prudential Long Term Equity Fund (Tax Saving) 12%20.1%

* The order of funds do not suggest any recommendations. The investor may choose the funds as per their goals. Returns are subject to change.

8. Conclusion

Investing in mutual funds might be a cumbersome task for a novice investor. In case you are finding it difficult and not able to decide which fund is the best for your requirements. Fret not. Head to ClearTax Save where the best performing mutual funds are handpicked by our experts.