You must have done filing your tax return and repenting why hadn’t you planned well to minimize your tax outgo. Only few months have passed in this financial year and you can very well plan your investment this year to save tax and escape reminiscing later. You can do this by investing in Tax Savings Mutual Funds aka ELSS Mutual Funds.
Mutual Fund is the best way to invest in stock market. It is an appropriate route for the people who do not possess knowledge and discipline of picking and sticking with the quality stocks.
ELSS (Equity Linked Savings Scheme) aka Tax Savings Mutual Funds are like icing on the cake. It offers twin benefits of tax deduction u/s 80C and capital appreciation. Apart from being EEE (deduction of invested amount, exemption of capital appreciation and tax-free maturity amount) scheme, ELSS Funds comes with the lowest lock-in-period amongst the investment list of section 80C.
Please note that deduction of investment in ELSS Funds comes under the threshold limit of Section 80C which also includes other investment avenues such as PPF, NSC, KVP, SSA etc.
Usually every mutual fund scheme offers three variants namely Growth Plan, Dividend Payout Plan and Dividend Reinvestment Plan. As the name suggest Growth Plan is a pure capital appreciation plan in which nothing is paid out and money grows till the maturity period while in the dividend payout option, a regular amount is paid out which gets reduced from NAV. Dividend reinvestment option is a combination of both plan i.e. dividend declared is invested to buy more units of scheme instead of payout.
Since ELSS is similar to any other diversified equity mutual fund scheme, it was also launched with the above 3 variants but the problem comes while claiming tax deduction under dividend reinvestment option. As the lock-in-period of 3 years commence from the date of investing, investor get caught up in the never-ending cycle of reinvestment and could not claim full deduction. Thus government phased-out Dividend Reinvestment Plan under ELSS Mutual Funds.
Top ELSS Tax Savings Mutual Funds Selection Procedure
I have considered following points in ranking ELSS Funds
- Past Performances
Consistent Return over long term of 3 to 5 years has been considered in ranking top 5 ELSS Funds.
- Asset under Management (AUM)
Only schemes having AUM above Rs.250 crore is taken, as high net assets denote the confidence and trust of the investors.
- CRISIL Ratings and Value Research Online Rankings
Schemes having CRISIL Ratings of 1 (5 stars) & 2 (4 stars) and VRO rankings of 4 stars & 5 stars have been taken into account.
- Expense Ratio
Expenses Ratio is passed on to the customers so funds having minimum expense ratio are considered.
- Stock Portfolio and Risk Parameters
Funds are also ranked as per their mixture of stock portfolio. Funds having high beta stocks have been ranked less and with low beta have been ranked high.
- Fund Manager and Fund Houses
Association of the Fund Manager with same mutual fund scheme and also the trust worthiness of fund houses are taken into consideration.
Top 5 Best Performing ELSS Tax Savings Mutual Funds
Axis Long Term Equity Fund
Reasons to Invest: Axis Long Term Equity Fund is a clear winner amongst in the ELSS Tax Savings Mutual Funds category. Despite of being newest fund, Axis Long Term Equity Fund has given return of 21.62% over the past 5 years. The AUM of the fund is as high as Rs.5,879 crores and the expense ratio of the fund is at par with other funds at 2.46%.
Stock Mix: Axis Long Term Equity Fund portfolio allocation comprises 3.50% of debt instruments and remaining 96.50% of equity. The fund has maintained a 55-60 % of large-cap stocks, 35-40% of mid-cap stocks, with a marginal small-cap allocation. The mid-cap weights are higher than peers.
Birla Sun Life Tax Relief 96
Reasons to Invest: Birla Sun Life Tax Relief 96 is a 2 decades old mutual fund consistently beating its benchmark S&P BSE 200. This fund is able to generate 28.12% return over the last 3 years. The AUM of the fund is as high as Rs.2,034 crores and the expense ratio of the fund is at par with other funds at 2.36%.
Stock Mix: Birla Sun Life Tax Relief 96 has major proportion of around 55% of large-cap stocks in its portfolio. Mid-Cap stock comprises around 30% and small-cap stocks are just around 15%. This fund has no debt instruments in its portfolio.
Franklin India Taxshield Fund
Reasons to Invest: Franklin India Taxshield Fund is given an impressive return of 16.61% in the last 5 years. The AUM of the fund is as high as Rs.1,854 crores and the expense ratio of the fund is at par with other funds at 2.43%.
Stock Mix: Franklin India Taxshield Fund portfolio consist 65% of large cap stock with 30% of mid-cap stock. Remaining 5% is allocated into cash and cash equivalent assets.
Religare Invesco Tax Plan
Reasons to Invest: Religare Invesco Tax Plan is a decade old fund manages to give returns of 15.295 in a long-run of 5 years. The AUM of the fund is at moderate level of Rs.260 crores and the expense ratio of the fund is at par with other funds at 2.87%.
Stock Mix: The portfolio is mostly invested with a 50-55% large-cap weight at most times with few giant caps which are balanced out by a higher 35-40% mid-cap exposure. The debt instruments are meager of 5% in the portfolio.
IDFC Tax Advantage (ELSS) Fund – Regular Plan
Reasons to Invest: IDFC Tax Advantage (ELSS) Fund is launched at almost same time of Axis Long Term Equity Fund. This fund manages to post returns of 15.4% in the last 5 years. The AUM of the fund is at moderate level of Rs.372 crores and the expense ratio of the fund is at par with other funds at 2.88%.
Stock Mix: The portfolio is mostly filled with equity investment of 95% leaving a tiny space of 5% for debt instruments. Both Giant and large cap stocks find 20% space in the portfolio. Mid-cap stocks have highest proportion of 40% with 15% of small-cap stocks.
Points to Ponder:
- To invest in ELSS Funds, DEMAT Account is not required. You can simply approach to the fund house and apply. Once you are allotted a folio number, you can start your investment as lump-sum or SIP.
- Lock-in-period of 3 years does not mean that you can stay invested only for 3 years. ELSS Funds are open ended scheme and can be continued for 10 years.
- Withdrawal before 3 years attracts tax, so avoid withdrawal before 3 years or say 5 years because equity investment tends to give better returns in long term.
Words of Wisdom:
Do not put all your money at once, go for SIP method to avail the Rupee Cost Averaging Advantage.