What is a MUTUAL FUND?
As the name suggests, when money is pooled by a lot of investors (i.e. a Fund) to invest in the capital markets with a pre-determined strategy acceptable to all (i.e. Mutually). This investment vehicle is managed by a professional asset manager who allocates money among the different asset classes available such as equity, bond, commodities etc.
Historically, these funds have provided a good return but still people avoid investing their hard-earned money in them due to lack of knowledge and confidence.
But what if I tell you that these funds provide you an income tax exemption too. That is where the role of Tax Saving Mutual Funds or Equity Linked Saving Scheme (ELSS) comes into play.
What is a Tax Saving Mutual Fund or an Equity Linked Saving Scheme (ELSS)?
It’s a diversified Mutual Fund that invests more than 65% in equities and helps you to avail tax benefits under the Section 80C of the Income Tax Act in an EEE format i.e. tax deductibility at the time of investing, tax free interim cash flows like dividend and no exit load. Though the laws have been changed after the latest ‘Indian Budget’ announced and now the long-term capital gains will be taxed at 10% for the gains above 1 lakh effective from 31st March, 2018. But you cannot give up on ELSS as it offers other tax benefits too.
The maximum tax deduction that can be availed is 1.5 lakhs in one financial year. It also has a lock-in period of 3 years which is still quite less than the other tax saving investments like PPF (15 years), NSC (6 years) and FD (5 years).
Criteria for Selecting the Best Tax Saving Mutual Fund
Now let us understand some of the basic attributes so as to evaluate the best Mutual fund
- Historical Performance- Generally people get attracted by a single year performance of the fund but a fund should be judged on the consistency of their returns. A horizon of 3 years to 10 years should be considered. Moreover, the performance should be judged by comparing it with its peers for a specified time period.
- Asset Under Management (AUM) – This is the quantum of money managed by a fund. A fund with huge AUMs are preferred as they show investor’s confidence and are generally managed by the most competent fund managers of the company.
- Expense Ratio- A fund charges some expenses in lieu of managing the money for you. These charges are quoted as a percentage of the total AUM and that is called as expense ratio. It is preferred to be as low as possible.
- Fund Manager- A good fund manager makes a good fund. Look out for the manager’s track record and his performance for the other funds that he is managing.
- Diversification- A well-diversified portfolio generally provides good returns on a consistent basis.
Top 10 Tax Saving Mutual Funds are
1. Reliance Tax Saver (ELSS) – Launched in 2005, this fund has shown outstanding results since inception. Its enormous AUM of Rs.10,157 Cr shows the strength of investor’s confidence. With a 46% return in the last one year, 15% return in the last 3 years and 23% return in the last 5 years, it has proven itself to be one of the best ELSS investment in today’s date.
2. Aditya Birla Sun Life Tax Relief 96– Being the oldest ELSS (1996), it has shown considerable high returns as compared to its benchmark. Its strategy does not give much weights to the market cap of the company, therefore it is concentrated towards the mid cap stocks. It provided a return of 40% in the previous year, 18% in the last 3 years and 22% in the last 5 years. It has an AUM of Rs.4,349 Cr and is known for being fully diversified.
3. Axis Long Term Equity Fund– With the largest AUM of Rs.15,408 Cr and the lowest expense ratio of 1.27% under the ELSS category, this fund has consistently performed well. It invests in companies considering their business model and growth potential. It has provided a return of 39% last year, 14% in the last 3 years and 23% in the last 5 years.
4. IDFC Tax Advantage ELSS Fund– Being ranked 1 on the CRISIL list, this fund has provided splendid returns from the beginning. It even provided positive returns during the bear market of 2011. It has given the highest return of 55% for the last 1 year period among its peers. Further it has provided an 18% return in the last 3 years and 21% return in the last 5 years. It has an AUM of Rs.798 Cr.
5. DSP Black Rock Tax Saver Fund– Despite of having a high expense ratio of 2.51%, this fund has been a choice of many. It aims at obtaining capital appreciation by majorly investing in equity and equity linked securities. With an AUM of Rs.3,571 Cr, it has provided a return of 33% in the last 1 year, 17% in the last 3 years and 21% in the last 5 years.
6. Tata Tax Saving Fund– Being rated 5 stars by the Value Research, this fund has performed consistently well during these years. With an AUM of Rs.981 Cr, it has provided a return of 47% over the last 1 year, 19% return over the last 3 years and 22% return over the last 5 years.
7. L&T Tax Advantage Fund– This fund primary invest in growth stocks and focuses on generating long-term capital gains by building a diversified portfolio. It manages an AUM of Rs.3,033 Cr providing a 1 year return of 22%, 3 year return of 12% and a 5 year return of 19%.
8. ICICI Prudential Long Term Equity Fund– The strategy of this fund is to invest in blue chips and medium cap companies and it had provided nice and stable returns to its investors. It manages an AUM of Rs.4,841 Cr. It provided a return of 24% in the last 1 year, 11% in the last 3 years and 18% return in the last 5 years.
9. Invesco India Tax Plan– It primarily focus on equity and equity related securities to achieve diversification. This fund also focuses on achieving capital appreciation by investing in growth stocks. It manages an AUM of Rs.494 Cr and provided a return of 38% in the last 1 year, 14% in the last 3 years and 21% in the last 5 years.
10. Franklin India Tax Shield Fund– This fund has provided considerable returns over a long period of time. Its investments are majorly in large cap stocks (81.2% of the portfolio). It has an AUM of Rs.3,417 Cr. It provided a return of 27% in the last 1 year, 13% in the last 3 years and 19% in the last 5 years.
Now let’s understand the above top 10 Tax Saving Mutual Funds in a comparative summarized table below:
|Rank||Tax Saving Mutual Fund||AUM
(in Rs Cr)
|1 Year||3 Year||5 Year|
|1||Reliance Tax Saver (ELSS)||10,157||1.98%||46%||15%||23%|
|2||Aditya Birla Sun Life Tax Relief 96||4,349||2.32%||40%||18%||22%|
|3||Axis Long Term Equity Fund||15,408||1.27%||39%||14%||23%|
|4||IDFC Tax Advantage ELSS Fund||798||2.32%||55%||18%||21%|
|5||DSP Black Rock Tax Saver Fund||3,571||2.51%||33%||17%||21%|
|6||Tata Tax Saving Fund||981||2.37%||47%||19%||22%|
|7||L&T Tax Advantage Fund||3,033||2.06%||22%||12%||19%|
|8||ICICI Prudential Long Term Equity Fund||4,841||2.31%||24%||11%||18%|
|9||Invesco India Tax Plan||494||2.44%||38%||14%||21%|
|10||Franklin India Tax Shield Fund||3,417||2.36%||27%||13%||19%|
Please Note: We don’t endorse or discourage any fund, so invest as per your best knowledge and understanding. The above figures are rounded off to the nearest percentages.