Tax saving mutual funds: Best tax saving mutual funds or ELSS to invest in 2017

Equity Linked Savings schemes or ELSSs are often called the ‘first’ mutual fund scheme. This is because most mutual fund investors get into mutual funds via ELSSs or tax saving/planning mutual fund schemes. Investments in ELSSs qualify for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Most investors start investing in ELSSs to save taxes, and slowly they start investing in other equity mutual fund schemes.

If you are not investing in ELSSs to save taxes under Section 80C, you should reconsider your decision to stick to traditional tax-saving options like Public Provident Fund (PPF), National Savings Certificate (NSC), etc. The government-backed tax-saving options offer assured returns. However, the returns are likely to be modest. So, using these options to fund your long-term financial goals may not be a wise idea.

ELSSs come with the shortest mandatory lock-in period of three years among the tax-saving options available under Section 80C. Other popular options like PPF and NSC have a much longer lock-in period. Though PPF allows partial withdrawal after five years, it is a product with a tenure of 15 years. NSC has a lock-in period of six years.

Sure, ELSSs are riskier than government-sponsored schemes. This is because ELSSs invest in stocks and stocks are risky and volatile in the short-term. That is why it is important to invest in ELSSs with a longer horizon than the mandatory three-year lock-in period. Since ELSSs are equity schemes, investor should be prepared to stay invested for at least five to seven years.

However, ELSSs also reward investors for the extra risk. For example, ELSS category has offered tax-free returns of around 13.52 per cent in three years, 17.29 per cent in five years, and 9.83 per cent in the 10-year horizon. Other government-backed schemes offer single-digit returns.

If you are interested in investing in ELSSs, here are our recommended schemes: L&T Tax Advantage Fund, Aditya Birla Sun Life Tax Relief 96, DSP BlackRock Tax Saver Fund. You may invest in these schemes via Systematic Investment Plans (SIPs). Keep an investment horizon of at least five years in mind. Also, try to link your ELSS investment to a long-term financial goal.

Also read:

5 things to remember before investing in ELSS

Data: Value Research

Methodology Mutual Funds has employed the following parameters for shortlisting the mutual fund schemes.

Mean rolling returns
: rolled daily for the last three years.

in the last three years : The three-year period is divided into smaller time periods each with a progressing weighting.

Downside risk
: We have considered only the negative returns given by the mutual fund scheme for this.

X = Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

Downside risk = Square root of Z

: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

Average returns generated by the MF Scheme – [Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}

Asset size
: For equity diversified funds, the threshold asset size is Rs 100 crore, and Rs 50 crore for balanced funds.

We have also conducted a back testing of our model portfolios. These returns are forward returns from the base date.

(Disclaimer: past performance is no guarantee for future performance.)

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