If you are looking out for information on ELSS mutual funds, then this article will take you through every aspect of an ELSS mutual fund, right from its meaning to its advantages. It will also guide you regarding the parameters to be considered while selecting an ELSS mutual fund.
What are tax-saving mutual funds?
Tax saving mutual funds are synonymous with the name “ELSS” or “Equity-Linked Saving Scheme. These mutual funds are a separate category within mutual funds which invest in a diversified portfolio in terms of market cap allocation. However, these funds have a mandate of investing at least 65% in equities and most of them remain fully invested in the asset class.
Why should you invest in ELSS mutual funds?
Though there are numerous options to invest in for tax savings, ELSS is one of the best options available. The reasons for this are:
- Investment in this mutual fund is exempt from tax u/s 80C of the IT Act, up to Rs.1,50,000.
- The lock-in period for these funds is just 3 years which is the shortest lock-in period that amounts to all the options covered u/s 80C. For instance, even government-backed schemes like NSC, PPF, EPF come with a minimum lock-in period of 5 years.
- Since the scheme invests in equities, the returns are quite high as compared to other investments offering benefits related to tax savings.
- Since the scheme is locked in for 3 years, there is no possibility of short-term capital gains. The Long-Term Capital Gains in the scheme follow equity taxation. Hence, if the gains from all equity transactions made in that financial year are less than Rs. 1 Lakh there will be no tax. Exceeding that limit, gains will be taxed at 10%.
Who must invest in these mutual funds?
These mutual funds are best suited for people who wish to stay invested for the medium or long term and those who are open to moderate risk. If you have just begun your career, you can invest in the ELSS keeping a long-term horizon in mind.
Young investors have a lot of time to enjoy the benefits of compounding and exemplary returns in addition to saving taxes, which makes ELSS a great option for them.
In order to benefit from the returns offered by any mutual fund, it is ideal for an investor to remain invested in the specific scheme for a minimum of 5 years as with time the volatility smoothens out. This becomes easier with ELSS as the schemes come with a mandatory lock-in period of 3 years.
If we have a look at the historical performance of ELSS over a period of 10 years or more, the returns generated by ELSS is around 12% in contrast to that offered by PPF, which is around 8%.
Which are the top 5 tax-savings mutual funds?
Let’s have a look at the top 5 tax saving mutual funds:
|Tax-saving Mutual Fund schemes||Launch Date||1-year Return||3-year Return||5-year Return||Top 3 Sectors||Fund Size||Fund Manager|
|(As of 31 Oct 2021)|
|1||Canara Robeco Equity Tax Saver Fund||31 March 1993||59.29%||26.12%||18.87%||Financial Technology Automobile||Rs. 2893 Crs||Vishal Mishra, Shridatta Bhandalwar|
|2||Quant Tax Plan||1 April 2000||77.4%||36.6%||26.8%||Financial Construction FMCG||Rs.487 Crs||Ankit A Pande|
|3||DSP Tax Saver Fund||18 Jan 2007||41.96%||22.17%||17.99%||Financial Technology Construction||Rs.9805 Crs||Charajit Singh|
|4||Mirae Asset Tax Saver Fund||28 Dec 2015||40.80%||23.00%||21.50%||Financial Technology Automobile||Rs. 10,146 Crs||Neelesh Surana|
|5||Axis Long Term Equity Direct Plan-Growth||1 Jan 2013||57.18%||24.50%||18.54%||Financial Consumer Service IT||Rs. 34,235 Crs||Jinesh Gopani|
There are plenty of ELSS mutual funds available. To cut the confusion of choice, let’s look at some of the factors you could consider before deciding which fund to invest in.
What are the factors to be considered while assessing which ELSS Mutual Fund is the Best?
There are a few factors that can be looked into when selecting an ELSS Mutual Fund. They are:
1. The Returns of the Fund
The first important factor is the performance of a fund. Investors can compare the performances of various funds over a period of 3, 5, or 10 years, based on which they can invest in a specific fund. The long-term performance of a fund gives an idea of how well the fund house has managed various market cycles.
However, one should not select a fund solely based on its past performance. Check some of the other factors mentioned below.
2. Total Expense Ratio
This is something that must be looked into. Total Expense Ratio or TER is an indication of the ratio of the investment used to manage the specific fund. A low expense ratio indicates a smaller amount used by the fund management as charges. This increases the probability of higher returns for the investor. On a like-to-like basis, if you are down to two funds with similar characteristics, a fund with a lower expense ratio is a better bet.
3. Risk Ratios
While returns are good, it is better to take a look at those from the lens of risk adopted. This can be done through parameters like the Sharpe ratio, the Standard Deviation, the Sortino ratio, and not to forget, the fund’s Alpha and Beta. Alpha is a measure of the fund’s outperformance as compared to the benchmark while Beta gives an idea of the fund’s volatility relative to the benchmark. Standard Deviation on the other hand shows the range of outcomes as compared to the average returns. Sharpe Ratio gives an idea of the return the fund has given as compared to the volatility it has experienced.
For an easy rule of thumb, look for funds with higher alpha and Sharpe Ratio along with lower beta and standard deviation. This should give you a good idea of why ELSS mutual funds work wonderfully well as a tax-saving investment and what should you look for while choosing a fund in the category.