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Save taxes with mutual funds: ELSS

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“Save taxes with mutual funds?”, my friend Ajay had a look of curiosity on his face as he heard this. “How is it possible?”

“Yes, it is. There are mutual fund schemes specifically created for this purpose. They are known as Equity Linked Savings Schemes or ELSS or Tax saving mutual funds.

I am sure you are aware that under Section 80C of the Income Tax Act, you can invest upto Rs. 1.5 lacs in various eligible investment options and claim deduction of income tax. Simply put, when you invest in those specified options you do not have to pay any tax on that portion of the income.

ELSS funds are eligible for such investment.” I took a pause.

“So these ELSS funds invest in stocks?” Ajay was excited.

“Yes, these funds invest most of their monies in stocks.”

Ajay looked happy. “Isn’t that a wonderful combination – save taxes as well as get benefit of equity investing?”

I nodded in agreement and said, “The popular idiom to describe such a benefit is to kill two birds with one stone. In Hindi, that would be ek teer se do shikaar.”

“Are there any restrictions that apply to this investment?” he enquired further.

“Not many. You will not be able to withdraw your money from the investment before completion of 3 years. Effectively, your investments are locked for 3 years. To get the tax benefit, that is the only thing they ask for.

In any case, investment in equities is a long-term proposition. So, this is a good thing to have. Also, if you see this lock-in is the least of all other investments eligible for tax-savings. PPF has a lock-in for 15 years (partial withdrawal allowed after 7 years), NSC is for 6 years and Bank FD for 5 years.”

“Yeah, I see the point. I guess this is wonderful. I want to invest. Now tell me which tax saving mutual fund should I invest in?”

“I was expecting this question Ajay.” I smiled.

“OK , since you have always shown a willingness to learn, let’s do something here. We have, in the past, spoken about selecting mutual funds. Do you remember that?”

“Of course, I do”, his reply was confident.

“Great! So, here’s what we will do. We will pull out information on tax saving mutual funds or ELSS and then you will work through that to select the one that you should invest in.”

“Oh! I wasn’t expecting this”, Ajay suddenly sounded hesitant. He thought for a moment and replied, ‘OK, lets do it!”

I had a smile on my face. “OK, lets.”

So, this is what we did.

Selecting the right tax saving mutual fund or ELSS

Ajay and I downloaded all ELSS scheme data from valueresearchonline. There were 53 mutual fund schemes that qualified for tax savings.

We were looking only at regular plans. We wanted to look at direct plans but there wasn’t enough data on the same for analysis. In any case, direct plans more or less replicate the regular plans, except for the expense ratio, which is lower in the case of former. As a result, direct plans deliver better returns.

OK. Ajay recalled the previous discussion and applied the rules to curtail the list further. Here is what he did?

  • First, he looked at the expense ratio, which is the cost of operating the scheme. He eliminated all schemes with an expense ratio of 2.5% or higher. This single filter removed 42 schemes. We were now left with 11 schemes.
  • He then applied the second filter, that of, turnover ratio. The schemes with turnover higher than 100% were eliminated. There was just 1 scheme that got eliminated here.
  • So, finally he was left with 10 schemes.

Here is the list of those 10 tax saving schemes along with some crucial information.

saves taxes with mutual funds ELSS

Note on expense ratio: It is important to note that Quantum Tax Saving Fund is a direct offering while others have regular plans with the distribution expenses included. For reference sake, you can easily deduct about 0.5% from the expense ratio of others to have a more comparable data.

Ajay hit a roadblock now.

From the final shortlist, he couldn’t decide which tax saving scheme to invest in. He tried to look at the returns too. Here’s the returns information on these schemes.

saves taxes with mutual funds else

In the first table, there is one with the lowest expense ratio and lowest turnover. In the second table, there is another with the best returns, which incidentally also has the best risk-reward ratio, that is, Sharpe ratio.

He was more inclined towards the best performance but wasn’t sure.

I suggested to Ajay, “Let’s put this dilemma across to our dear readers and seek their views. There is nothing better than learning from each other.”

So, here it is dear reader. Can you help Ajay? Let’s use this opportunity to add to our own skill and learning about mutual funds.

Which tax-saving scheme from the above 10 would you recommend to Ajay and why? Use the comments section and let me know your views and answers. I am waiting. 🙂  

50 thoughts on “Save taxes with mutual funds: ELSS”

  1. Hehe, I am not that technical like you but I am investing in it from last 5 years so my personal experience is good. And just a search on Google shows similar views from other people. Basically Franklin, dspbr and axis all fall in same league

  4. Hi Vipin,
    Thanks for your wonderful article. What is your opinion on Quantum Tax Saving Fund? AUM of the fund seems around just 50cr.Will it be wise to have a SIP in that fund? Or shall I opt for Franklin Elss?

  6. I have heard that after this budget session, ELSS will attract tax obligations. So ELSS will not be attractive as an tax saving measure.. What are you thoughts about this Vipin?

    • I don’t know what tax obligations will the new budget bring in. If ELSS attracts tax obligation, then a whole host of other tax saving instruments too will. In all, this doesn’t seem like a big issue. Tax laws keep getting changed and one can attune the investments to them accordingly.

      Thanks for reading and the comment Prashant.

  7. Hi, I am new to MF’s. Have planned to invest in ELSS. Please suggest four schemes where i can invest with the %age of investment. The goal is tax saving & wealth creation. I am looking for a period of 10 years.

    Also wanted to do it online, so kindly suggest two best options.

  9. Myself wants to invest 10000 rs per month as SIP in ELSS.
    I recieved the following list of top performing fund over a 3-5 year time frame:
    Axis long term equity, Franklin India Tax shield, Reliance Tax Saver, ICICI pru long term equity fund, Birla Sunlife tax 96, BNP paribas long term equity, DSP blackrock tax saver fund, Canara rebeco tax saver, Idfc tax advantage, Tata india tax savings.
    Please advice me on which of the above funds to select and how to split my 10k.

  11. Vipin, this post was left open ended. If you had to invest yourself where will you put your eggs?

  13. vipin I have recently invested in sundaram select mid cap for MF investment.
    what do you think about this?
    new to MF world so need your expertise

  14. Is it a good idea to leave the money in ELSS funds after the lock-in (as an ordinary mutual fund), or is it better to move the money to a normal diversified equity fund? Will the latter have better returns or lower risk?

    • Yes, of course. Equity is meant for long term so unless your fund is doing horribly, you can continue to stay put in the same fund. You can switch to a normal diversified equity fund that you already hold. However, as for switching, you might want to consider it for the simple reason of managing a lesser number of funds.

  15. I am inclined for Qunantum tax saving fund.. 2 simple reasons…

    1. Convience – I can invest online, with out any hassle no paper work required. Whenever I have some saving after month end, I just logged in to QMF and invest, even if returns are moderate or not best, I prefer convenience. Can’t go here and there and submit SIP forms.
    2. Having been a part of Quantum group, I know personally about them, working methodology, stock selections process, and yes low expense ratio.

    I am looking to diversify my portfolio, but I am not sure whcih other MF is offering complete online process for investing. If there are any who wont ask me to submit form, or any paper work, I an happy to invest, If there aren’t any happy with QMF.

      • All funds offer ‘online’ facilities for all the transactions except probably that one time you have to contact them for KYC compliance and filling-up of the form, etc. Rest throughout your life, you can do online transactions without any hassles.

  16. Undoubtedly in Axis LT plan Fund and Franklin India Tax Shield Fund. In fact the actual returns over different time periods only corroborates this. Return results are given after all expenses are provided including Fund Management Expenses also.

  17. After realizing that staying invested in equities for the long term is the only true method of wealth creation, I’ve been only investing in ELSS for my tax saving investments over the past year.
    Have divided my investments into the direct growth plans of 2 funds-
    70% – Axis Long Term Equity Fund
    I mainly looked at the expense ratio, portfolio and returns while selecting this fund.
    The returns have been spectacular and that’s probably the combination of all the factors highlighted in your post. Apart from that, it’s the portfolio that made this a strong buy a for me. With quality businesses delivering high ROE such as HDFC Bank, Eicher, Gruh, Page, etc. this fund had to perform well. The turnover is an interesting thing your post has highlighted and that also tells you why it has performed so well.
    30% – Franklin India TaxShield
    I didn’t want to put all my eggs in one basket, hence needed to chose another ELSS fund. Apart from the returns and reasonable expense ratio, didn’t find anything spectacular about this fund. It’s portfolio seemed decent but not great. Decided to invest as this seemed the 2nd best option in the universe of ELSS funds.

    • Gurjot, I am so happy to read your thoughtful answer. I totally buy your thinking on the selection process.

      I have no doubt that you will do very well with your investments.

      All the best.

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