5 BEST ELSS 2021

In a hurry to choose the most convenient investment instruments for the purpose of saving tax, investors often ignore the Equity Linked Savings Scheme (ELSS). As this article shows, ELSS has many benefits apart from its tax-saving approach. Also, read on to choose from the top five ELSS that will add value to your investment portfolio. 

Ranbir Sharma recently got a mail from his human resource team requesting submission of documents related to investments made by him during the financial year. Sharma has an outstanding home loan, life insurance and dependent parents. He also contributes towards Public Provident Fund (PPF) as a taxsaving measure. Recently, a customary call to his financial advisor led to an impromptu discussion over tax-saving instruments, which turned out to be an eye-opener for this resident of Rajasthan. Sharma realised that he should have invested in Equity Linked Savings Scheme (ELSS), something which he had missed till now. 

There are many such people who tend to forget the existence of ELSS or tax-saving mutual funds while making their investment decisions for tax savings. In this issue, as the countdown to the end of the financial year begins, we have taken up the subject of ELSS to show how it makes for a good investment decision. The article also includes five best ELSS schemes which investors can choose from. For many tax-payers who are yet to exhaust their entire limits of investments under Section 80C of the Income Tax Act, 1961, ELSS or tax-saving mutual funds remains one of the best options compared to other instruments. 

Although there is a complete range of tax-saving instruments available to you, we believe ELSS scores higher over other options when it comes to tax-saving. ELSS, in fact, provides a number of benefits unlike most other such instruments in this segment. The return on investments can be higher and it helps to save on tax liabilities. Some of the other instruments include Public Provident Fund, National Savings Certificate, Unit Linked Insurance Plan, etc. The likes of PPF, NSC and others carry lower risk but come with lower coupon or interest rates so that you may end up with lower returns on your investment as compared to ELSS in the long run. Here is an example to differentiate between ELSS and any other scheme. Assume that you invested Rs1 lakh each in NSC and ELSS five years ago i.e. in 2016. In that case, your investment would have grown to Rs1,47,614 assuming 8.1 per cent of annualised rate for NSC. In the case of ELSS, your investment would have multiplied to Rs1,71,564 at a rate of 11.84 per cent (annualised average ELSS category return in the last five years) during the same period. Therefore, your investment in ELSS has outperformed by 24 per cent on your initial investment.

To get a better picture of how ELSS has performed standalone .we measured the rolling returns for different periods. There are almost 41 ELSS’ out of which 18 of them have either Nifty 500 or BSE 500 as their benchmark. Hence, we compared the average performance of ELSS against Nifty 500 and took the average rolling returns of ELSS and Nifty 500.

The table clearly shows that in any period, on an average, ELSS has outperformed Nifty 500. ELSS return is taken as the average of all the scheme returns under ELSS. Hence, while saving on tax is definitely one of the reasons for investing in ELSS, we see that one can invest in these funds for gains too. In the following graph, we are listing five best ELSS out of which you can choose a maximum of two depending upon your risk return appetite. 

Axis Long-Term Equity Fund-Direct Plan



This is a fund that has remained one of the most consistent performers in its category. Besides, it is also the best performing fund in an all-time period. In the last 10 years, the fund has generated return of 16.81 per cent annually. It is not only in point-to-point return where the fund has outperformed; even the rolling return of the fund is impressive. The three-year rolling returns of the fund for the last decade ending December 2020 has yielded average return of 20.32 per cent. What has helped the fund to perform is its ability to manage downside risk. In 2018, when the category average generated negative return of 9.07 per cent, the fund was able to generate positive return of 2.67 per cent. 

Even during the March 2020 fall, the fund fell less than its category. It fell by 21 per cent in the month of March 2020 against a 25 per cent fall witnessed by the category. All this is reflected in the capture ratio of the fund that stands greater than one. The SIP return generated by the fund is one of the best in category. For every Rs1,000 invested every month as an SIP starting January 2018, the corpus has now reached Rs49,000. Therefore, your investment of Rs36,000 would have become Rs49,000, yielding an XIRR of 21.23 per cent. The fund usually has a concentrated portfolio. 

At the end of November 2020 there were only 32 stocks in the portfolio and 63 per cent of the net assets are invested in the top ten stocks and around 38 per cent in the top five stocks. These concentrated bets have helped the fund to outperform. This fund selects stocks based on bottom-up selection process by focusing on the appreciation potential of individual stocks from a fundamental perspective. The universe of stocks is carefully selected to include companies having robust business models and enjoying sustainable competitive advantages as compared to their competitors. The fund has invested around 83 per cent of the assets in large-cap stocks, 13 per cent in mid-cap stocks and the rest in small-cap stocks. The fund is suitable for a moderate risk-taker.

Canara Rob Equity Tax-Saver Fund



This fund was launched in the year 2009 and has completed 12 years. Since its inception the fund has generated compounded annual growth rate (CAGR) of 19.71 per cent. What this means is that every investment of Rs1 lakh made in the fund would have become Rs8.66 lakhs now. The fund has been managed by Cheenu Gupta since 2018 and has consistently outperformed its category returns as well as the broader market. In the last three years the fund has yielded annualised return of 15.40 percent compared to 7.04 per cent by its category. 

Comparing returns from the broader market, in last three calendar years every year the fund has outperformed Nifty 500, including 2018 when Nifty 500 gave return of negative 1.8 per cent but the fund was able to generate a return of 3.53 per cent. The fund follows a growth style of investment and selects stocks across the capitalisation range. However, the latest portfolio of the fund shows that the fund is tilted towards large-cap. At the end of November 2020, this scheme had invested around 69 per cent in large-cap stocks, 22 per cent in mid-cap stocks and 7 per cent in small-cap stocks. The category average investment in large-cap is 57 per cent. With large-cap stocks having had a good run in the last few years, the fund has outperformed its peers and the benchmark. 

In terms of portfolio, the fund is overweight on financials, technology and chemicals. The fund holds all the blue-chip companies from these sectors. For example, in financials, it holds HDFC Bank, ICICI Bank and SBI. In IT, the fund holds both Infosys and Tata Consultancy Services. While selecting companies, the fund opts for those that have a strong competitive position with good business and quality management. It follows an active investment style supported by in-house research. Looking at the current constituents of the fund, it is more suited for an investor with low risk appetite. 

BOI AXA Tax Advantage Fund



A lot has changed for good for this fund in the last couple of years. A fund that used to have higher contribution of small-cap and mid-cap stocks in its portfolio now has larger contribution of large-cap stocks. This move has helped the fund to remain in the top quartile in terms of performance in the last one year in its category. Over the past 12 months the fund has generated return of 38 per cent compared to 22 per cent generated by its peers and category. Nonetheless, the fund is not consistent in its returns. However, the better part is that a few years of outperformance may cover up lost ground and some more. In the last seven years ending 2020, the fund has underperformed its category average in four years. However, outperformance by a huge margin over a couple of years has helped the fund to remain in the top quartile of performers in the long run. For example, after underperforming its peers in 2018 by 6 per cent, the fund outperformed with a huge margin in the two years that followed. It was more than enough to make up the underperformance of 2018. The fund has parked almost 57.31 per cent of its portfolio in large-cap stocks while 30 per cent is into mid-cap stocks. Small-cap stocks comprised only 9.54 per cent of its total portfolio at the end of November 2020. 

The fund has larger allocation towards mid-cap stocks compared to its category, which invests on an average below 20 cent on mid-cap stocks. At the end of November 2020, the fund held a well-diversified portfolio with 63 stocks of which the top 10 stocks held 39.54 per cent of the total assets. The stock-picking strategy adopted by the fund manager clearly favours those companies with strong growth outlook and ethical management. Though the fund has generated good returns and remained a top performer, looking at the portfolio construction and inconsistent returns we believe that this fund is suitable only for aggressive investors with a higher risk appetite and with slightly longer term investment horizon.

Mirae Asset Tax Saver Fund - Direct Plan



Here comes a fund that has consistently beaten its benchmark and category average every year since its inception. The fund that was launched in December 2015 has never underperformed even when the market gave negative returns. For example, in 2018 when the category average return was negative 9.07 per cent, the fund was able to arrest its fall to negative 2.27 per cent. In a nutshell, this is a fund that performs in both falling as well as rising market. All this is reflected in the geometric capture ratio of the fund, which is 1.17. The up capture ratio that shows how the fund has done when its benchmark was going up is 1.09, which means that if the benchmark has moved up by 1 per cent the fund will move up by 1.09 per cent. But when the benchmark falls by 1 per cent, the fund falls by a mere 0.92 per cent. 

The reason behind such performance is the investment approach of the fund. It follows a bottoms-up philosophy while the investment style is of the blend sort. The fund invests in value stocks in a growth-oriented sector or business. These companies should be available at reasonable valuation. There is flexibility to invest across market capitalisation, theme and investment styles. The fund manager broadly analyses the macro economy and invests in stocks of high-growth companies expected to benefit from macroeconomic, sectoral and industry trends. 

While picking companies, the fund manager tests business on various quantitative and qualitative parameters and gives importance to ROCE, growth, ROI, value and management. He looks for growth businesses and within that looks for value. The fund manager uses discounted cash flow mechanism to estimate the fair valuation level of stocks. Currently, the fund manager is bullish on financials that constitute 36.25 per cent of its total assets followed by energy that constitutes 11.99 per cent of the portfolio. Thus, looking at the fund’s portfolio and its performance since inception, low-risk investors can take limited exposure to the fund. 

Aditya Birla Sun Life Tax Relief-Direct Plan



This is one of the oldest mutual fund schemes and was launched in the year 1996. As such, it has seen more market cycles than any other fund in this category. It has yielded a compounded annual growth rate (CAGR) of 23.33 per cent since its launch. What this means is that if you had invested Rs1 lakh at the launch of the fund, today’s value would have been eye-popping Rs1.9 crore over a period of 25 years. It has helped the fund to gather the second-largest AUM in the category. Currently, the total assets managed by the fund stand at Rs12,118 crore. For the direct plan of the fund that was introduced in 2013, it has beta of 0.88. 

The important part is when the benchmark goes up the fund has better beta of 0.94 but when the benchmark falls, the fund has a beta of 0.83 times. The geometric information ratio of the fund stands at 0.14. The geometric information ratio is a version of Sharpe ratio, but unlike the Sharpe ratio, the benchmark doesn’t have to be risk-free in terms of return. In the information ratio, the default benchmark is the benchmark return. What has also helped the fund to perform is its lower drawdown. The fund has a maximum drawdown of 29 per cent and even during the fall in March 2020 it was limited to 20 per cent compared to 24 per cent by category and peer’s average. 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. Those companies having business uncertainty are not considered for investments. At the end of November 2020, this scheme had invested around 45 per cent in large-cap stocks, 44 per cent in mid-cap stocks and 8 per cent in small-cap stocks. It has remained almost unchanged in the last couple of years. Nevertheless, this fund is on the margin of a concentrated portfolio with almost 57 per cent of the assets invested in the top 10 stocks. Looking at the current constituents of the fund with more of mid-cap stock , it is more suited for an investor with higher risk appetite.