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.
Investing in the mutual funds is one of the best options to gain the maximum returns for the capital invested in the market. It is a better way to make money. Mutual fund are for long term investment goals. In order to gain the benefits, the mutual funds investments have to be reviewed and tracked regularly. The performance of the mutual fund has to be seen in the right way.
Considering the current situation, where the market is down owing to COVID-19 pandemic, many of you must be thinking how to check whether you should continue to stay invested or redeem your investments. Although if you have invested for long term goals, short term volatility should not bother you. But still we can track the performance of our portfolio and take the informed decision based on the outcome.
Though the future of the mutual fund are not dependent upon the past performance, the performance of the mutual funds are mathematically calculated based upon the performance in history. The mutual relationship between the potential risk factors and the potential returns are the determiners of the performance of the mutual funds.
Here are some of the key points to consider while evaluating the performance of the mutual funds –
- Risk adjusted returns: In general terms, the risk adjusted returns are the calculated returns that take into consideration the risk involved in the funds. For instance, we are comparing two mutual fund with similar returns. The one with the lesser risk will be a better option.
- Benchmark: It is a way of standardizing the quality of the funds. It is considered as a point of reference. Any mutual fund that has outperformed the benchmark is considered superior than ones which have underperformed compared to benchmark.
- Relative performance evaluation: The comparison of the performance of the mutual fund with that of the peer mutual fund is one of the options to track the mutual fund’ performance. It is just a measure of the effectiveness of the mutual funds.
- Evaluate the quality of the stocks: The portfolio of the mutual funds deals in various stocks. It is a point of consideration, whether the stocks are of good quality or not. The stocks will be performing in the market and the returns gained on your investment in the mutual funds are dependent upon the stocks. So it is necessary to track the quality of the stocks in the fund.
- Track the competence of the fund manager: The fund manager of the mutual fund company is the person that chooses how and where your invested capital will be placed to work. The fund manager is responsible for taking all the major investment decisions. One can track the past performance and records of the fund manager to determine the competence and experience in his decisions.
These key factors are used for tracking the performance of schemes offered by the mutual funds. The tracking and evaluation procedures can be done by following the proper guidelines. There are various mathematical models and calculations that can help the individuals to efficiently track the performance.
Various methods by which one can track the performance of the mutual funds –
- Use the various mutual funds trackers that are available in the market. One such platform is “Fintoo”. It is simple to track. You just have to go to your Dashboard, click on the transactions. Next click on the small “i” icon against the name of the scheme. It not only provides you the details about the past performance of the mutual funds but also evaluates how much rate of returns has been provided by the funds in a particular time frame. It helps to understand whether the returns that have been availed over the investment capital are good enough or not.
- Factsheets Fact Sheets are considered as a score card of a Mutual Fund. While referring to the factsheets for the performance of the mutual funds, one must take the help of the financial advisor. The factsheets are generated after the completion of the particular time period and as per the guidelines of the capital market regulator, the mutual funds have to give returns every month.
- Rolling Returns The factsheets do not mention anything about the rolling returns that are provided after a particular time. It is used to maintain the consistency of the mutual funds. So check the average of rolling returns, if the average is higher than the benchmark then the funds are good.
To sum up, you can begin the procedure of tracking the performance by comparing the scheme with the benchmark and if it has outperformed the benchmark, the next step would be to compare the performance with the mutual fund category. Additionally, you can check the portfolio of the scheme and compare it with the peers.
If your fund is not performing based on these factors, then you should switch it to better performing funds. But while doing so, it is suggested that you take help of a finance expert to guide you and optimise your portfolio performance keeping in mind exit loads and taxation.
The finance minister Nirmala Sitharaman had announced that the deadline for investing in tax-saving instruments for the financial year 2019-20 has been pushed to 30th june 2020.
The usual deadline was March 31.
This move was taken as the entire country is in lockdown and it has been difficult to make last-minute tax investments.
If you have already invested for FY 2019-20 then you can invest to save tax for FY 20-21.
So are you looking for a tool to save tax?
Are you a risk taker?
Do you want to achieve a higher corpus?
If your answer is yes in all the three cases, then Equity Linked Saving Scheme is the right fund for you. It qualifies for all the above questions.
ELSS (Equity Linked Saving Scheme) is a diversified Mutual Fund and as the name suggests, majority of the fund is invested in equities. It is a saving scheme too, as it helps in saving your taxes, this deduction is available or can be claimed under section 80C. It appreciates one’s capital as well as saves taxes.
Let us now look at the tax benefits of this fund.
Tax planning plays a very crucial part in Financial Planning.
Tax is where you can save most of your money from getting deducted. As mentioned earlier, this deduction is allowed under section 80C.
However, to avail this benefit, you have to keep the fund for a lock in of 3 years. For example, If I invest in an ELSS fund, I cannot touch that fund for 3 years.
It is different in the case of a person investing through SIP (Systematic Investment Planning). Since he is investing every month, he can withdraw the whole amount after 6 years or the other option available with him is to invest through SIP for 3 years and withdraw monthly for the next 3 years.
So all the monthly investments will have completed the 3 years lock in period. The maximum amount that you can claim under section 80C is Rs. 150000/-.
The added advantage is the gain realised upto Rs.1,00,000 in a financial year is also tax free. Any long term capital gain over 1 lakh attracts the tax of only 10%.
That is why it is considered as one of the most tax efficient investments.
There are 2 types of Equity Linked Saving Scheme funds:
- Growth Funds:This is simple, You invest a lump sum and withdraw the whole amount after maturity, If it’s through SIP, then make a monthly withdrawal after 3 years. So each SIP, will complete 3 years.
- Dividend Scheme: Under this option, you receive regular dividend, as and when the company declares.
Now we talk about, what to look for when choosing an ELSS fund:
- Long term performance is a must, to look at in an equity fund. People invest in equity only for long term, as it provides better returns in the long run, that also depends on the past performance.
- You have to look at the past performance of the fund before investing. You must see how often the market has fluctuated and how the fund performed compared to it’s benchmark. Check the volatility and accordingly make a decision.
- Fund Manager’s approach is also important.Check the track record of Fund Manager and instances where he is able to outperform the market indexes.
- Portfolio of the fund is important too. One should be comfortable in the avenues, the fund is being invested in.
- Expense Ratio is one more point to look at, while choosing an ELSS fund. The less the expense ratio, the better.
Let us see the advantages of ELSS over other tax saving tools, under section 80C:
- Lock in period: Compared to NSC, PPF and fixed deposit, the lock in period for ELSS is less. It is 3 years for ELSS, while for NSC it is 6 years, PPF it is 15 years and FDs it is 5 years.
- If we look at long term returns, ELSS will give you better returns than other investments.
- The procedure to invest in an ELSS is very easy as compared to the other investments. For investments like, NSC and life insurance premium, it takes 7 to 15 days to start, whereas in ELSS, the investment begins immediately.
There are just 2 disadvantages of ELSS funds:
- Investors, who do not want to take the risk, while investing, will not find it appropriate to invest in an ELSS fund. Higher the returns, the more risk involved. So it all depends on one’s risk appetite.
- Early withdrawal is also not possible in the case of an ELSS fund. One will have to wait for atleast 3 years.
So if you’re looking for a tax saving long term investment and willing to take the risk to for higher returns, ELSS is the best option for you.
You can invest in an Equity Linked Saving Scheme fund online through Fintoo from the comfort of your home.
When it comes to saving taxes, there are myriad options available but nothing works like Equity Linked Saving Scheme. ELSS or Equity Linked Saving Schemes comes with a lock-in period of 3 years, which is the shortest holding compared to all other tax savings. By Investing in ELSS, one can attain deductions up to INR 1,50,000 from their taxable income as per the Section 80C of Income Tax Act. As ELSS funds are equity diversified with a major portion of the fund being invested in equity & related products, they provide equity returns too. This means that investors can also earn equity returns on their investments.
Owing to the popularity of the funds, there is an option to invest through both the dividend and growth options. Investors get a lump sum on the expiry of 3 years in growth schemes while in a dividend scheme, investors get a regular dividend income, whenever declared by the fund, even during the lock-in period.
Who should invest in ELSS?
The ELSS is the best option for individuals who are looking for investment avenues which will yield decent returns in the long run, and provide tax-saving benefits also. It is ideal for investors who are looking to invest money for at least 3 years and are vouching for additional benefits of income tax saving coupled with higher returns expectations. All in all these investors should also be prepared for the possibility of moderate losses since the funds invest in equity stocks.
The top ELSS schemes to invest in the year 2020
1) Axis Long Term Equity Fund:
- An open-ended equity scheme generating long term capital appreciation
- Statutory lock-in of 3 years and tax exemption on investment
- The highest value of total assets under management
- Whopping returns of 20.25% in the 7 – year time frame.
- Fund Allocation: 98.52% investment in Indian stocks of which 67.01% is in large-cap stocks, 17.01% is in mid-cap stocks, 6.72% in small-cap stocks
2) Kotak Tax Saving Scheme
- Fund Allocation: 97.64% investment in Indian stocks of which 47% is in large-cap stocks, 29.68% is in mid-cap stocks, 11.73% in small-cap stocks.
- additional benefits of income tax saving apart
- higher returns expectations
3)DSP Tax Saving Fund:
- An open-ended equity mutual fund scheme,
- invests in equity and equity-related securities of high growth corporates
- more than ₹6,000 crore fund size
4) Mirae Asset Tax Saver
- invests in equity stocks of flourishing companies
- the fund is relatively new compared to other top ELSS funds
- since its inception, it has delivered whopping returns of 19.39%.
5) Aditya Birla Sun Life Tax Relief 96
- asset allocation in equity securities to foster significant capital appreciation in the long run.
- it has allocated around 44% of assets to large-cap stocks.
- provides substantial stability against market volatility.
What are the advantages of investing in ELSS?
Even with the risk involved, ELSS is capable of delivering significantly higher returns as compared to traditional tax-saving instruments.
ELSS has the lowest lock-in period amongst all other tax-saving avenues. The lock-in also develops a disciplined approach in the investor.
The ease of transacting in an ELSS scheme is available with the Systematic Investments Plan approach.
Any investor has the option of investing either online i.e through investment platforms (Fintoo) or by visiting the AMC’s websites. One can also fill out the form and submit it at a nearby branch of the fund house, or invest through a broker (offline mode)
What are the drawbacks of investing in ELSS scheme?
ELSS is not available for those who are risk-averse and want safer options since ELSS invests in equity stocks. So it is advisable to steer clear from ELSS if you are not willing to take a risk. Also, due to the lock-in period, you can not withdraw the money before the maturity date. Park your funds in any other option if you need liquidity.
Invest in the ELSS scheme now for better returns and tax benefits