TOP 5 ELSS Mutual Fund Schemes

There is an interesting fact about people who buy life insurance policies. They suddenly get a realisation, in the month of March that they are going to die soon! And therefore, they purchase life insurance policies. Historical data shows that most of the life insurance policies are sold in March and is often more than twice of the other 11 months.



On a serious note, these policies are bought in that month to save tax. Life insurance is one of the most prominently used instruments to save tax. It has been observed that in India, when it comes to tax savings, people are more affectionate towards traditional investment avenues such as life insurance.

There is nothing wrong in buying insurance policies; however, they should not be mixed with investment. Many of the traditional insurance products give very suboptimal returns and at the same time, might not give you the adequate life cover.

Such an investment might lead to an opportunity loss to create wealth. This happens especially in a case where the investor has little or no knowledge about investment or tax planning. There is a lot of difference between tax saving and tax planning. When you take insurance policy on the 11th hour with an intention to qualify for the deduction under section 80C of Income Tax Act, then that is tax saving. Whereas, if you plan to save tax right at the beginning of the financial year, then you can easily save tax as well as invest in an investment avenue that would suit your financial situation and risk profile. Tax planning would help you to achieve most out of your investment.

One of the most popular tax saving option which will help you in achieving both, is investment in Equity Linked Savings Scheme (ELSS). These types of tax saving mutual funds were taken under the umbrella of section 80C of Income Tax Act to increase the retail participation in equity markets. So, now let us understand what these ELSS funds are and why you should invest in them.

What is ELSS?

ELSS is one of the main categories of equity mutual funds having investment objective of providing capital appreciation along with benefit of claiming deduction up to Rs 1.5 lakh under section 80C of Income Tax Act. For example, if you are in a 30 per cent tax bracket, you can save taxes up to Rs 46,800. Although, it is important to know what are the traits of ELSS to make sure it is the best-suited investment for you. ELSS comes with a lock-in period of three years, which is the lowest among other tax saving options. ELSS works similar to a multi-cap fund. This means that they should have minimum 65 per cent of investment in equity or equityrelated securities and they are free to invest across market cap.

Now the question is why should they be considered for tax planning? One of the main reasons is their higher returns as compared to other tax saving instruments. The table (Comparative analysis of Tax Saving Instruments under Section 80C) below shows how ELSS scores over others in terms of returns. In the last three years, it has generated highest return among all the other instruments.

Now let us look at the performance of ELSS category as against S&P BSE 200 (benchmark of maximum funds in the category). This will give us an idea about how they perform in the long run as individual asset without considering tax.



As we can look at the above graph, ELSS as a category was able to beat its benchmark most of the time since year 2012. It is clearly visible that in long run ELSS proves to be a better investment option even without considering its tax saving benefits.

There is no denial to the fact that similar to life insurance policies, even ELSS see a jump in the investments in last three months of any fiscal year, especially March. These investment habits may not give you optimal returns so, it is important to go for tax planning instead of tax saving.

In the following paragraphs, we are listing 5 Best ELSS, out of which you can choose maximum of two depending upon your risk appetite.



Aditya Birla Sun Life Tax Relief '96 - Direct Plan



This fund was launched in the year 1996 and has seen almost three market cycles. It has given Compounded Annual Growth Rate (CAGR) of 23.65 per cent since its launch. Currently, the total Assets Under Management (AUM) of the fund stands at Rs 9,814 crore. The scheme being multi-cap in nature follows an aggressive approach while investing. It can be gauged from the fact that it has a higher allocation towards mid-cap and small-cap stocks compared to the category as well as benchmark. The fund adopts the growth style of investing; however, the investment philosophy of this fund is to invest in good quality businesses. They look for businesses with good management led by strong promoters, especially those who adhere to best corporate governance practices and spend good amount in research and development. The companies having business uncertainty are not considered for investments.

At the end of October 2019, this scheme has invested around 45 per cent in large-cap stocks, 44 per cent in the mid-cap stocks and 11 per cent in the small-cap stocks. Nevertheless, this fund is on the margin of a concentrated portfolio with almost 60 per cent of the assets invested in the top 10 stocks, but this has favoured it in the long run. The fund is consistent in its return in longer period. For the period from December 2010 to November 2019, the fund has given 3-year average rolling returns of 28.81 per cent which is more than category average of 24.60 per cent and more than twice of its benchmarks (S&P BSE 200) average of 12.35 per cent. Looking at the current constituents of the fund, it is more suited for an investor with higher risk appetite. 

Axis Long Term Equity Fund - Direct Plan



This fund has created its place to call it as the benchmark of managing an equity fund. This fund has always been on top of the list whenever a fund is evaluated based on its risk and returns. The Axis AMC had launched this fund in the year 2009 and has generated annualised returns of 17.07 per cent since launch. In terms of performance, this fund has been the beast. The only underperformance of the fund against the category and the benchmark since its launch was in the year 2016, when it gave negative returns whereas, the category and benchmark gave positive returns in that period. Presently, it has invested 95.31 per cent in equity and equity-related instruments and 5.01 per cent in debt. They have invested around 75 per cent of the assets in large-cap stocks, 23 per cent in mid-cap stocks and mere 2 per cent in small-cap stocks.

The fund has a very concentrated portfolio with only 32 stocks in the portfolio and a whopping 65 per cent of the assets that are invested in the top 10 stocks and around 37 per cent in the top 5 stocks. However, its investment philosophy has helped this fund to rise above its peers. This fund selects stock based on bottom-up stock selection process by focusing on appreciation potential of individual stocks from a fundamental perspective. Axis AMC employs a fundamentals-based research process to analyse the appreciation potential of each stock in its universe. The universe of stocks is carefully selected to include companies having robust business models and enjoying sustainable competitive advantages as compared to their competitors.



Looking at its performance for the period from December 2010 to November 2019, its 3-year annualised rolling returns stands at 31.91 per cent which is highest in the category that beats the category average of 24.60 per cent as well as its benchmark (S&P BSE 200) that gave 3-year average rolling returns of 12.35 per cent. This shows that even after having a concentrated portfolio, the fund has delivered consistent returns. Even the portfolio turnover is on the lower end as the fund manager is expected to buy those stocks that is believed to deliver superior earnings growth over a one to two-year period. Hence, this fund is best suited to those investors who are willing to take little bit of risk to get rewarded handsomely. 

DSP Tax Saver Fund - Direct Plan



Nothing has changed for the DSP Tax Saver fund in terms of its performance even after a few senior level exits at the fund house and buyout of Blackrock’s stake in the company. In last one year, it has been able to beat the category and benchmark by a good margin.

This fund is in the game since 2007 and has gone through two market cycles. It has given CAGR of 13.41 per cent since launch. This scheme follows a bottom-up approach for stock selection by giving due consideration to low price-to-earnings, price-to-book, and price-to-sales ratios, as well as improving margins, asset turns, and cash flows, amongst others.

While considering individual investment opportunities, among the defined universe eligible for investment, the fund manager seeks both value as well as growth investing strategy. While determining if the stock is a value stock, the fund manager looks into the long-term growth potential of the company and evaluates it under different parameters such as strong brand equity, growing market share, strong management and technological excellence. If it is not getting reflected in the current price of the stock, it may form part of the fund.

While evaluating the growth stocks, the supernormal growth of the company could be due to a new product, a new process, growing market share, stronger brand equity, technological breakthrough or unique/predominant position in a market, among other factors.

This scheme has invested almost 77 per cent of its assets in large-cap stocks, 14.48 per cent in mid-cap stocks and 8.51 per cent in small-cap stocks. This investment philosophy has helped this fund to do well not just in the long run but also in the short run. So, if we look at the 3-year average rolling returns of the fund for the period from December 2010 to November 2019, then it stands at 27.61 per cent which is again higher than its category average of 24.60 per cent and benchmark (Nifty 500) that gave 3-year average rolling returns of 12.73 per cent for the same period. This shows the consistency in the returns of the fund and is aloof to change in the structure of the fund house. This fund is suited to a moderate risk-taking investor.

Invesco India Tax Plan - Direct Plan


Invesco India came up with this scheme in the year 2006 and has given annualised returns of 13.72 per cent since then. This fund has survived two market cycles. The best part of this fund is that it performs better when the market falls. Say for instance in the year 2008, 2011 and 2018, this fund fell less compared to its benchmark as well as its category. Nevertheless, it performed well not just in falling market but also in the rising market. For example, in the year 2014, it generated return of 57.3 per cent which was higher than the category as well as the benchmark. There is no period where it has underperformed its benchmark and category. Currently, it is holding 95 per cent in equity and equity-related instruments and 5 per cent in cash. It has invested around 71 per cent of its assets in large-cap stocks, 23 per cent in mid-cap stocks and 6 per cent in the small-cap stocks. The fund has large-cap biased portfolio which helped it to sustain the current market turbulence.

This fund tends to follow blend of top-down and bottom-up approach for stock selection. The fund focuses more on sector selection and then uses bottom-up approach to identify stocks. The scheme at all times aim to have a well-diversified portfolio for which it uses three levers to construct the portfolio viz. stock selection, capitalisation bias and sector allocation.

If we look at its performance from December 2010 to November 2019, then the 3-year average annualised rolling returns stand at 27.17 per cent whereas, the category average for the same period stands at 24.60 per cent. It has even surpassed the benchmark returns (S&P BSE 200) which gave 3-year average rolling returns of 12.35 per cent in the same period. This shows the consistency in terms of returns. Looking at the fund’s current portfolio and better performance of the fund in the falling market, we can say that it is best-suited for conservative investors. 

Tata India Tax Savings Fund - Direct Plan



The funds managed by Tata AMC in recent years, has been gaining momentum as some of its equity funds are performing well. Similarly, the ELSS managed by the AMC has proved itself to be in the list of DSIJ’s Top 5 ELSS. Tata had launched this scheme in the year 1996 and since then, it gave CAGR of 18.77 per cent. Tata India Tax Saving Fund has the lowest expense ratio of 0.64 per cent, thereby making it one of the cheapest among the Top 5 ELSS. This scheme follows focussed multi-cap approach and holds only 35 stocks and S&P BSE Sensex being its benchmark. The fund holds 98 per cent of the assets in equity and equity-related instruments and remaining 2 per cent in cash. Being a focussed multi-cap, it makes its portfolio more concentrated in nature. Its 58 per cent of the assets are invested in Top 10 stocks and 37 per cent in Top 5 stocks. As it is benchmarked against S&P BSE Sensex, almost 80 per cent of the assets are invested in large-cap stocks, 14 per cent in mid-cap stocks and 6 per cent in small-cap stocks. Due to its large-cap bias, it has helped this fund tide the current market volatility. The long-term performance of the fund is impressive and in the long run, it has never underperformed its peers.

Interestingly, this scheme follows the mix of top-down and bottom-up stock selection process. The sector selection is done based on the analysis of business cycles, regulatory reforms, competitive advantage, future outlook, etc. post which selective stock picking is done from these shortlisted sectors. The Stock selection is done based on the fundamentals of the business, the industry structure, the quality of management, corporate governance trends, sensitivity to economic factors, the financial strength of the company and the key earnings drivers.

This investment strategy has helped Tata India Tax Saving Fund to earn consistent returns. This scheme gave 13.01 per cent returns in last 10 years and has outperformed its benchmark and category by 2.47 per cent and 2.15 per cent respectively. Even on the trailing basis, the fund has consistently beaten its category in 1-month, 3-month, 6-month, 1-year, 3-year, 5-year, 7-year as well as 10-year period. We suggest this fund for moderate risk-taking investor.