What are ELSS Funds?
Equity Linked Saving Schemes (ELSS), popularly known as tax saving mutual funds, are equity-oriented mutual funds. As per the SEBI regulations, ELSS funds have to invest at least 80% of their corpus in equity or equity related instruments.
These funds come with a lock in period of 3 years and qualify for tax deduction under Section 80C. Investments in ELSS of up to Rs 1.5 lakh per financial year can be claimed as tax deduction under this Section.
Why invest in ELSS funds for saving tax?
ELSS schemes have superior product features than other tax saving investment options under Section 80C like PPF, ULIP, NSC and tax saving bank FDs.
Higher returns: Even though equities as an asset class can be very volatile in the short term, they usually beat other asset classes including the fixed income asset class by a wide margin over the long term. Hence, being invested in equities, ELSS funds have the potential to generate higher returns other Section 80C instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) and tax saving bank fixed deposits over the long term.
Shortest lock-in period: The lock-in period of ELSS funds is just 3 years, the lowest among all tax saving investment options eligible for Section 80C deduction. Among other Section 80C options, NSC has a lock-in period of 5 years whereas in case of tax-saving fixed deposits, the lock-in period is 5 years. The lock-in period of PPF is also 15 years whereas the lock-in period in case of ULIPs is 5 years. Thus, ELSS funds offer the highest form of liquidity among all tax saving investment options.
As ELSS funds offer the greatest potential of creating wealth over the long term, these can be an excellent tool for achieving long term financial goals like children’s education fund and post-retirement corpus with contributions lower than its fixed income alternatives.
The 3-year lock-in period in ELSS funds also reduces the redemption pressure for their fund managers during volatile markets. This allows their fund managers greater flexibility to take a more long term view while dealing with market volatility with respect to other open-ended funds.
Table of Best ELSS Funds for 2020:
|1 year||3 year||5 year||7 year||10 year|
|Axis Long Term Equity||0.13||4.92||7.37||16.73||14.28|
|Mirae Asset Tax Saver||2.05||5.32||—||—||—|
|Invesco India Tax Plan||5.29||4.56||7.06||15.38||11.67|
|Aditya Birla Sun Life Tax Relief 96||3.25||2.28||6.79||15.29||10.11|
|DSP Tax Saver|
|Kotak Tax Saver|
|ICICI Prudential Long Term Equity||-5.48||1.96||5.11||13.48||9.85|
|Motilal Oswal Long Term Equity|
|Tata India Tax Savings|
|Nippon India Tax Saver|
(S&P BSE 500 TRI)
|ELSS category average||-0.91||0.53||5.23||12.65||9.19|
(Data as on 27th July 2020: Source: Value Research)
Axis Long Term Equity Fund
- Invests in quality businesses with a long term approach
- Uses bottom-up approach for stock picking
- Can invest across market capitalisation, usually in a mix of large caps (around 50-100%) and select midcaps (up to 50%)
- Quality and long term earnings growth prospects are also used for stock selection
- Uses a research process based on fundamentals to analyse the growth potential of stocks having strong business models and sustainable competitive advantages over their competitors
Mirae Asset Tax Saver Fund
- Aims at building a diversified portfolio of strong growth companies at reasonable price across market capitalisation, themes and investment styles
- Uses a bottom-up approach for stock selection driven by value investing in growth oriented businesses
- Investment decisions are based on broad analyses of the macro economy, business cycles and industry trends
- Prefers companies with high return ratios, robust business models and sustainable competitive advantages over their competitors
- Aims to invest in large base of stocks to avoid concentration risk
- Monitors the trading volumes of identified stocks before investment to avoid liquidity risk
Invesco India Tax Plan
- Invests across market capitalisation and sectors with a long term perspective
- Uses bottom-up approach for stock selection with a growth bias
- Prefers companies growing their businesses on a profitable and sustainable basis and available at a reasonable price
- Uses capitalization bias, stock selection and sector allocation to generate alpha
Aditya Birla Sun Life Tax Relief 96
- Uses a combination of bottom-up and top-down approach for stock selection
- Top-down approach helps in analyzing changing economic trends, key policy changes, macroeconomic factors, infrastructure spending, etc
- The bottom up approach is used to identify companies with strong competitive position in good businesses and stable management focused on long term fundamental growth
DSP Tax Saver
- Uses multicap strategy of investing with a longer investment horizon
- Seeks portfolio diversification across sectors and styles to create a durable portfolio
- Invests in established and emerging businesses to provide a combination of stability and growth
- Follows a combination of top-down sector allocation and bottom-up stock selection approaches
- Uses a blended analysis of valuation support and growth drivers for stock selection
- Constantly monitors future prospects and price targets for investment decisions
Kotak Tax Saver
- Uses a bottom-up approach for stock selection across market capitalization
- Invests in stocks priced at material discount to their intrinsic value
- Prefers companies with strong financials, reputed management and relatively less susceptible to recession or business cycles
- Also prefers companies with strategies to build strong brands and franchises
ICICI Prudential Long Term Equity Fund
- Selects stocks with a long term view
- Follows a value based approach during stock selection
- Focuses on companies’ business fundamentals, quality of management, financial strength, key earnings drivers and industry structure during stock selection
Motilal Oswal Long Term Equity
- Follows an investment style and philosophy based on ‘Buy Right: Sit Tight’ principle
- ‘Buy Right’ refers to buying quality stocks at reasonable price
- ‘Sit Tight’ refers to remain invested for a longer time to realize the maximum growth potential
- Follows bottom-up approach for stock selection
- Uses a benchmark agnostic approach to build portfolio consisting of high conviction stock ideas and low portfolio churns
- Believes in adequate diversification with less number of stocks
Tata India Tax Savings
- Uses a blend of growth and value styles of investment
- Stock selection process is driven by fundamental research
- Uses a 5-point evaluation criteria for identifying stocks — efficient use of capital, earnings growth prospects, valuation, liquidity and corporate governance
Nippon India Tax Saver
- Aims at generating sustained long term growth.
- Offers optimal mix of defensive and cyclical themes.
- Investment philosophy as of May 2020 —
- Maintains balance between large cap and mid cap
- Invest in companies high growth prospects over the medium term (2-3 years.
- Takes 2 or 3 sector calls at a time in line with emerging market trends
- A small proportion is invested in contrarian calls
- Significant exposure to MNCs and high conviction mid-cap companies
Tips for investment in ELSS funds
- Compare the past performance of 3-, 5- and 7-year periods while making fund-selection. While no one guarantee past performance in future, comparing their past returns can help in depicting how they coped with various market conditions.
- Don’t wait for the last quarter or month of the financial year for investing in ELSS. High valuations in the equity market at that time, if any, would cost you more for the ELSS fund units. Instead, opt for the SIP option to spread your investments across the year and benefit from cost averaging during market correction, if any, in the interim.
- Don’t opt for the dividend option. Instead, opt for the growth option to benefit from power of compounding. Dividends are also taxable at the hands of investors as per their tax slab.
- Opt for the direct plan for higher returns. As direct plans have lower expense ratio than the growth plans, the savings generated remains invested in the fund itself generating higher returns over the long term.