How to identify the best tax saving fund in 2021-22?

How to identify the best ELSS Fund for investment in 2021-22?

by Rajeev Pathak

Some of my friends have asked me How to identify the best ELSS Fund for investment in 2021-22. Once, we decide to invest in ELSS as an instrument for tax saving, the next question comes to our mind which fund I should select. This question becomes more important when we find that during the last one and half years, some of the ELSS funds have appreciated by 50 to 88%.

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What are ELSS Funds?

Before we go further, let us understand what are ELSS Funds. This information may be useful for first-time investors in mutual funds or a new taxpayer.  

ELSS stands for Equity Linked Savings Scheme. They are mutual fund products and are actively used for tax savings. ELSS is one of the many instruments to save income tax. Investments made in ELSS are eligible for tax benefit under section 80C of the Income Tax Act. 

There are several other instruments eligible under 80C including EPF (Employees Provident Fund ), PPF (Public Provident Fund), Instalments / EMI (Equated Monthly Instalments) of Home Loan, NSCs (National Savings Certificates, contributions made to Sukanya Samrudhi Yojna, Life insurance premiums, banks’ designated term deposits (TDRs) and so on.  

Why ELSS has become popular?

ELSS has become more popular in recent years mainly for the following  reasons:

Minimum lock-in period

The lock-in period in ELSS is only 3 years. That is much less than the lock-in period of 5 years in the bank’s TDR and 15 years in PPF.

The expectation of good returns

Secondly, exposure to equity markets makes ELSS more attractive from the point of view of appreciation. Investors look towards it as a measure to create wealth in the long term in addition to tax saving.

Tax-efficient 

ELSS funds provide us tax benefits u/s 80C. The maximum limit for benefits is Rs.1,50,000. As regards, the treatment of gains on maturity also makes ELSS more tax efficient. Any gains under ELSS are treated as Long Term Capital Gains. As taxation itself is a very wide subject, I am not going into the details at the moment. 

Please importantly note that Mediclaim premium paid to buy Health Insurance is covered u/s 80D. 

The lowest minimum amount

The minimum amount of investment in ELSS is only Rs.500. It makes it very attractive not only to taxpayers but also to other small investors. The maximum amount for benefit under Section 80C of the Income Tax Act is Rs.1,50,000.

What are the risks in ELSS?

• As the name of the scheme suggests, funds are invested in equities or equity-linked products. Investments in Equity are always considered to be a risky affair. 
• Volatility is common in equity markets. 
• There is no guarantee of assured returns.  
• The principal is also at high risk.

After a brief and fair understanding of ELSS, now let us frame the rules for our study to identify the best ELSS.

Assets under Management (AUM):

Different AMCs (Asset Management Companies) have different sizes of AUM (Assets under Management) in their portfolio of  ELSS mutual fund schemes.  There are some whose portfolio of investment is in 2 digits and there are others whose AUM is in 5 digits. Please remember we are talking AUM in terms of rupees in crores.

However, it does not mean that funds with 2 digit portfolios are not good. They may have performed even better. They may grow into 3, 4, or 5 digits AUM in the future. They may also have much more potential.  

In my opinion, it will be unfair to compare funds holding large AUM with small ones. The reason being it will not reflect the correct picture of growth in terms of percentage. Therefore, I have compared funds with an AUM of at least Rs.1000 crore or more for this study.

NFO क्या होता है और उसमें कैसे निवेश करें , जानने के लिए इस लिंक पर क्लिक करें ।

Ideal period for a performance review:

During the last one and half years, equity markets have outperformed and so have our ELSS Funds. Some ELSS Funds have grown by 50% to 88%. 

We are aware that the minimum lock-in period in ELSS is 3 years. If we have invested in recent years, we can only view the growth figure in our mutual fund statements and feel happy. We can’t take the profit home.

The issue is what should be an ideal term for reviewing an ELSS fund. Should it be one year, 3 years, 5 years, or more?

In my view, we have to watch for the performance somewhere between 3 to 5 years. Beyond that, it becomes a little lengthy and susceptible to more risks.

Past performance:

We all know that in equity markets, investment should be made for the long term. It is also understood that the past performance of an equity fund may or may not be sustained in the future. 

The fact remains that we have to have some basis to choose a fund and past performance gives us at least an indication of fund managers' investment philosophy and performance based on some data.

The basis for selection of best fund:

So, finally, I have made an attempt to identify the best ELSS funds for investment in 2021-22, based on the following parameters,

• Minimum AUM is Rs. 1000 crore & above,
• Minimum CAGR of 15% for last 3 years. 

We have also included 5 years of CAGR in the last column to give a fair idea of the fund’s performance between 3 to 5 years.

The basis for a Minimum Return:

Why we have taken a minimum 15% growth rate for comparison. The reason being all other instruments eligible under section 80C give us a return between 6 to 8% at present. So even a 12% expected return could have been acceptable. 

We have compared funds at a minimum of 15% as they have actually performed to this level.

Based on the above parameters, the following funds emerge as the Top funds for investment in 2021-22.

 

Top 10 ELSS Funds with an AUM of Rs. 1000 crore & above As on 08.09.2021 

 

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Fund/ Scheme Name	AUM (Rs. in crore)	3 Years CAGR	5 Years CAGR
MIRAE ASSET TAX SAVER FUND Invest Now	8739	21.03	20.49
CAN ROBECO EQUITY TAX SAVER FUND	2469	20.8	18.39
DSP TAX SAVER  FUND	9333	19.36	15.79
AXIS LONG TERM EQUITY FUND	31015	17.94	17.2
KOTAK TAX SAVER FUND	2144	17.45	14.89
UTI LONG TERM EQUITY (TAX SAVER) FUND	2046	17.27	14.82
IDFC TAX ADVANTAGE (ELSS) FUND	3316	16.06	16.4
INVESCO INDIA TAX PLAN	1775	15.36	15.44
HDFC LONG TERM ADVANTAGE FUND*	1329	15.25	15.02
TATA INDIA TAX SAVING FUND-Invest Now	2760	15.07	14.25

Data source: Advisor Khoj

* Old scheme tax benefit u/s 88

Please note that the above list of schemes is not a recommendation. The list is prepared for study purposes only. Investors should consult their financial advisors for investment.

Now consider the returns given by ELSS in comparison to other tax-saving instruments. You will find a substantial difference between the traditional tax-saving products and ELSS. In some cases, the difference may be more than 100%.

So this is my way of addressing the question, How to identify the best ELSS Funds for investment in 2021-22. Hope you will appreciate it. We welcome your suggestions to improve further. Kindly post your views in the Comments Section just below the blog post.

You may also like to learn, How to generate a Common Account Statement for all your mutual fund holdings, available with this link at this website. 

Another related article by the author:

Financial Planning for Sr. Citizens

Disclaimer:

Investments in mutual funds are subject to market risks. Past performance may not be sustained in the future. Please read the scheme documents carefully before investing.

Contact: boirajeev@gmail.com