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Three mutual fund tax saver funds to invest this season

December 20, 2017 by Anirudh Dar

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With a little over three months left till the end of this financial year, you should now plan your tax saving investments with some urgency, unless you have already made your Section 80C investments. Section 80C of Income Tax Act allows tax payers to claim deductions of up to Rs 1.5 lakhs from their taxable income by investing in certain instruments. Some 80C investment options like Public Provident Funds (PPF), National Savings Certificates (NSC), tax saver term deposits (offered by both banks and post offices), Senior Citizen Savings Schemes (SCSS) etc. are risk free investments. Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs) are subject to market risks.

What is Equity Linked Saving Schemes of Mutual Funds

Despite their higher risk profiles, Mutual Fund Equity Linked Saving Schemes (ELSS), also known as tax saver funds, is one of the most popular investments allowed under Section 80C because they have a much higher potential of wealth creation over a sufficiently long investment horizon compared to risk free tax saving investment options like PPF, NSC and Fixed Deposits. An ELSS is a diversified equity mutual fund scheme with a lock in period of three years from the date of the investment.

Historical data shows that equity is the best performing asset class over a long investment period outperforming asset classes like gold and fixed income (debt). In the last 20 years, the BSE Sensex has given 11.8% annualized returns, while gold has given 9.2% and fixed deposits have given 7.2% annualized returns respectively. ELSS or tax saver mutual funds are also most tax efficient 80C investments. Profits (capital gains) made in ELSS mutual fund investments are tax free. Dividends paid by ELSS mutual funds are also tax free.

ELSS mutual funds offer higher liquidity compared to all Section 80C investment options. PPF have tenures of 15 years with limited liquidity in the interim. Traditional life insurance policies also have long maturity tenures and surrender charges may apply if you want to surrender the policy before maturity. Unit linked life insurance policies (ULIPs) usually have lock-in period of 5 years; if you stop paying premiums before the 5 year period, surrender charges will apply and you will lose your insurance cover. NSC and tax saver FDs (banks or post office) also have 5 year tenures. ELSS or tax saver mutual funds have a lock-in period of just 3 years and this makes them the most flexible tax saving investment schemes.

In this article, we will review three of the best ELSS mutual funds based on long term track record of consistent performance. Please note that we will review the ELSS funds in alphabetical order of the fund names.

However to see the comprehensive list of top performing ELSS funds you may check this section on our website – Top performing ELSS Mutual Funds

Axis Long Term Equity Fund

This scheme has given investors more than 20% annualized returns over the last 5 years. It has outperformed the ELSS category across most time-scales. While the fund has failed to beat the ELSS category in the last 1 year, the performance of the fund has nonetheless been strong (around 30% returns) in the last 1 year (see the chart below).


Source: Bridge Investments Research


Rolling returns are one of the best performance measures of mutual fund schemes. The three year rolling returns of this fund both versus the benchmark and the ELSS category is outstanding. Three year rolling return period is appropriate for ELSS mutual funds because ELSS has a three year lock in period. The chart below shows the 3 year rolling returns of Axis Long Term Equity Fund versus the benchmark (BSE 200) and ELSS category over the last 5 years. You can see that the fund has consistently outperformed both the benchmark and the category.

Rolling Returns versus Benchmark


Source: Bridge Investments Rolling Returns versus Benchmark


Rolling Returns versus ELSS Category


Source: Bridge Investments Rolling Returns versus ELSS Category


The portfolio is sufficiently diversified, with a large cap bias, with the top 5 stocks, HDFC Bank, Kotak Mahindra Bank, Maruti Suzuki, HDFC and MothersonSumi accounting for less than 35% of its portfolio. The fund is biased towards cyclical sectors with banking, finance and automobiles accounting for 55% of the portfolio.

Aditya Birla Sun Life Tax Relief 96

The scheme’s 5 year annualized return stands at over 20%, while 3 year annualized returns stand at nearly 17%, outperforming the ELSS funds category across both the time-scales. The last one year performance of this fund was outstanding at nearly 38% comfortably beating the ELSS category. (see the chart below).


Source: Bridge Investments Research


The three year rolling returns of this ELSS mutual fund scheme both versus the benchmark and the ELSS category is outstanding. The chart below shows the 3 year rolling returns of Aditya Birla Tax Relief 96 versus the benchmark (BSE 200) and ELSS category over the last 5 years. You can see that the fund has consistently outperformed both the benchmark and the category.

Rolling Returns versus Benchmark


Source: Bridge Investments Rolling Returns versus Benchmark


Rolling Returns versus ELSS Category


Source: Bridge Investments Rolling Returns versus ELSS Category


The portfolio is sufficiently diversified, with almost equal allocations to large cap and midcap stocks. The top 5 stocks Sundaram Clayton, Honeywell Automation, Gillette, Johnson controls – Hitachi Air Conditioners and Bayer Cropscience account for less than 33% of its portfolio. The fund is biased towards cyclical sectors like automobiles, banking, finance, consumer durables, industrial capital goods, cement etc, but it also has about 20% portfolio allocation to defensive sectors like FMCG and Pharmaceuticals.

DSP BlackRock Tax Saver Fund

This scheme has given investors more than 20% annualized returns over the last 5 years. It has outperformed the ELSS mutual fund category across most time-scales. While the fund has failed to beat the ELSS fund category in the last 1 year, the performance of the fund has nonetheless been strong (nearly 30% returns) in the last 1 year (see the chart below).


Source: Bridge Investments Research


The three year rolling returns of this fund both versus the benchmark and the ELSS category is outstanding. The chart below shows the 3 year rolling returns of DSP BlackRock Tax Saver Fund versus the benchmark (CNX 500) and ELSS category over the last 5 years. You can see that the fund has consistently outperformed both the benchmark and the category.

Rolling Returns versus Benchmark


Source: Bridge Investments Rolling Returns versus Benchmark


Rolling Returns versus ELSS Category


Source: Bridge Investments Rolling Returns versus ELSS Category


The portfolio is sufficiently diversified, with a large cap bias. The top 5 stocks HDFC Bank, Tata Steel, Gas Authority of India Limited, ICICI Bank and ITC account for less than 20% of its portfolio. The fund is biased towards cyclical sectors like banking, finance, petroleum, gas, metals, construction etc.

Conclusion

In this article, we have reviewed some of the most consistent ELSS funds for FY 2017 – 2018 Section 80C tax saving investments. Investors should consult with their financial advisers, if these funds are suitable tax saving investment options for them.

You may also like to read about the tax benefits of mutual funds versus other investment options

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.