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 and tax-saving fixed deposits has a lock-in period of 5 years. The lock-in period of PPF is also 15 years whereas the lock-in period in the 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.
Best ELSS funds for tax saving in 2020-2021
1. Mirae Asset Tax Saver Fund
- Aims at building a diversified portfolio of strong growth companies at a reasonable price across market capitalization, 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 macroeconomy, 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 a large base of stocks to avoid concentration risk
- Monitors the trading volumes of identified stocks before investment to avoid liquidity risk
2. Aditya Birla Sun Life Tax Relief 96
- Uses a combination of bottom-up and top-down approach for stock selection
- The 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 a strong competitive position in good businesses and stable management focused on long term fundamental growth
3. Kotak Tax Saver
- Uses a bottom-up approach for stock selection across market capitalization
- Invests in stocks priced at a 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
Related article: How ELSS is better than any other Tax saving scheme?
4. Axis Long Term Equity Fund
- Invests in quality businesses with a long-term approach
- Uses a bottom-up approach for stock picking
- Can invest across market capitalization, 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 analyze the growth potential of stocks having strong business models and sustainable competitive advantages over their competitors
5. Motilal Oswal Long Term Equity
- Follows an investment style and philosophy based on the ‘Buy Right: Sit Tight’ principle
- ‘Buy Right’ refers to buying quality stocks at a 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 a portfolio consisting of high conviction stock ideas and low portfolio churns
- Believes inadequate diversification with a smaller number of stocks
Important points to select the best ELSS funds:
- Compare the past performance of 3-, 5- and 7-year periods while making fund-selection. While no one guarantees 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 a market correction, if any, in the interim.
- Don’t opt for the dividend option. Instead, opt for the growth option to benefit from the power of compounding. Dividends are also taxable at the hands of investors as per their tax slab.