A mutual fund is one of the best venues to get exposure in the equity markets. It is an ideal route for people who do not have the knowledge or discipline to pick quality stocks and stay the course. Tax savings mutual funds provide you the double advantage of saving taxes and enhanced return.
ELSS (Equity Linked Saving Scheme) is a type of tax saving mutual funds eligible for deduction under 80C. Many people do not make use efficient use of ELSS. It can be a double hit if utilized properly.
ELSS or Tax Saving Mutual Funds
The Government of India provides tax deduction upto a limit of Rs. 1,00,000 when an individual invests in an ELSS scheme.
It’s just like any other deduction under 80C section. Please note that the cumulative deduction is One lakh. So if you made other investments for 50,000 for eg., in PPF, insurance, National Savings Scheme then you can make use of the remaining 50,000 for ELSS investment.
Why is ELSS one of better options under 80C ?
An ELSS scheme gives you equity exposure and provides tax exemptions. So double benefits for salaried employees.
- It has been shown that equity can provide better (if not the best) returns among all asset classes.
- If you make losses, you can adjust it against capital gains on other profits (That is not what we desire though J )
- You get professionals to manage your funds invested in the equity markets.
- These tax saving mutual funds give you a well-rounded diversified asset allocation
- A Systematic Investment Plan (SIP) method will give you Dollar/Rupee Cost Averaging advantage
- Potential of no tax on long-term gains. Since ELSS have predominantly equity, you do not need to pay tax on long-term gains. YOU GET TAX FREE GROWTH
- Compared to PPF with 15 years lock in, Equity Linked Savings Schemes just have a 3 year lock in (shortest in tax saving category). Even tax saving fixed deposits have 5 years lock in.
The negatives of ELSS/tax saving mutual fund investments
- Equity is a volatile asset class. If you are the kind of person looking at investments every day , it will get your heart rate up.
- If invested in lump sum combined with wrong timing, the returns can be negative over the short run.
- A minimum lock in of at least 3 years
- You have to choose the better managed ELSS mutual funds. You do not want to get into a bad fund.
Tip #1: An ideal method to invest in tax saving mutual funds would be to take an SIP method.
Tip #2: It should be in a well-managed(credible fund manager) fund from a reputed mutual fund house.
Tip #3: Don’t invest in one lump at March (or end of financial year) to get tax savings. Markets may be at the higher end. Then if market goes down, your values shrinks drastically. As said above, split them over several months in uniform way.
Best tax saving mutual fund schemes
ELSS schemes typically invest majority in equity markets. So a prudent decision goes a long way. We used filters like :
- 5 year performance – performance over long term
- quality fund house – safety, trust worthiness
- Decent fund manager – long track record with same mutual fund
- Quality of stock portfolio – A mix of Less high beta coefficient(more risk) and more quality durable business stocks in protfolio
- Risk parameters – Standard deviation, Beta, Sharpe ratio were considered
- Potential – To perform better in future based on stocks held
Some options are Axis Long Term Equity Fund, ICICI Pru Tax Plan, HDFC Tax Saver (G) . You can check them out at Moneycontrol.com .In no particular order….
|Fund name||AUM (Assets Managed in crores)||5 year annualized return||Fund Manager||NAV(in Rs)|
|Axis Long Term Equity(G)||920||21.2%(4.5 years)||Jinesh Gopani||19.83|
|ICICI Pru Tax Plan (G)||1547||24.3 %||Chintan Haria||192.4|
|HDFC Tax Saver (G)||3455||20.9%||Vinay Kulkarni||286.63|
|Franklin India Tax Shield(G)||980||20.5%||Anil Prabhudas||279.54|
|Reliance Tax Saver(G)||1948||21.4%||Ashwani Kumar||28.82|
Impressive ,isn’t it? As we have maintained, equity has the highest return over longer term. No other investment can match for it in a consistent way. Of course the trick here is to pick good stocks/funds, stick with them long time . Also you need to time the investments(if one time lump) else do in SIP method.
Tax saving mutual funds are not included in the draft DTC under 80C section eligibility. But DTC has not taken effect still and we do not know when it will. So we do not know how long the deduction eligibility will continue.Anybody looking to save tax must make use of these ELSS funds. The returns on investments made now will be available even after DTC takes effect.
Tip #5: You do not need to have a Demat account to invest in ELSS schemes. You can directly approach the fund house and apply. Once you get the folio number ,you can start an SIP method.
Tip #6: Be disciplined. Better make an ECS mandate so that you will be debited automatically ever month.
Tip #7: Do not withdraw from tax saving mutual funds before 3 years or better 5 years. We mentioned already that ELSS have a 3 year lock-in period.Equity tends to work in longer term.
Tip #8: Just because ELSS have only three years lock in period it does not mean you must invest only for 3 years. They are open ended and can be continued for longer than 10 years.Also tax saving mutual funds managers tend to be a bit conservative than thematic/diversified equity funds. So it directly reduces the risk little compared to diversified funds (Note: With lower risk, returns of ELSS schemes also tend to be lower than diversified funds :-))
Hope we have answered the questions in your mind. Did we miss something on tax saving mutual funds? Let us know in the comments. Because we will include them to benefit readers in future. Useful post? Like It, Share It, Follow Us
Disclaimer: Recommendations are based on the current fund performance. Past performance is no indication of future performance. Investors must consult their financial planner or do their own analysis before investing. We do not get paid for making these recommendations.