Tax Saving ELSS Mutual Funds

This is yet another post from the Suggest a Topic page, and in this post I’m going to take a look at the ELSS (Equity Linked Saving Schemes) mutual funds or tax saving mutual funds in a  little bit of detail.

Let me start off by telling you that there are plans to phase out the tax breaks on ELSS mutual funds with the introduction of the Direct Tax Code (DTC), so this avenue is going to be closed in the coming years.

However, you can still invest in it this year and get tax breaks. These tax saving mutual funds are covered under Section 80C, which means that you can invest a maximum of Rs. 1 lakh in them, and reduce that amount from your taxable income.

There is a lock-in period of 3 years on such funds, which means that you can’t sell these funds within 3 years of your purchase date.

I saw an interesting question on Value Research some time ago where someone had written in to ask what happens when they select the dividend re-investment option in the case of a ELSS fund.

The dividend that is invested back in the scheme is considered fresh investment, so what happens is that this money is further locked in for three years, and this can create an infinite loop. I’m not sure what will happen going forward with DTC coming in, but it’s best to play it safe, and go for the Dividend or Growth option of the ELSS you’re buying.

Before we get down to the options available under ELSS funds, let’s recap the points discussed so far:

  1. The tax benefit of ELSS will be phased out with the introduction of DTC.
  2. The tax benefit is still available this year.
  3. There is a lock in of 3 years, so you can’t sell these tax saving mutual funds within 3 years of purchase.
  4. If you use the dividend re-investment option then the amount re-invested will be treated as fresh investment, and will be locked in for 3 years from the time of re-investment.

ELSS Mutual Fund Options

I wrote a post on how to find tax saving mutual funds some time ago, and I used that information to get a list of all the ELSS mutual funds currently available in India, and then narrow down options from there.

Then I looked at the funds that were around for 5 or more years, and took the 10 best performing out of them.

After that I noted their expense ratio, as well as their inception date in the table below. Doing this gave me a list that has some tax saving funds that have been around for a very long period, and have done reasonably well over that period. The expenses are important because they eat up your returns, so I wanted to highlight them as well.

The limitation with this list is that it doesn’t contain any mutual funds that have been around for less than 5 years even if they performed well. For example – DSP Blackrock is a ELSS mutual fund that has been around for about 4 years, has done well during that time, but is missing from this list.

Name Inception Date 5 year returns Expense Ratio
Birla Sun Life Tax Relief – 96 March 1996 16.57% 1.96
Canara Robeco Can Equity Tax Saver March 1993 22.31% 2.38
HDFC Tax Saver March 1996 17.80% 1.86
ICICI Prudential Tax Plan August 1999 15.48% 1.98
SBI Magnum Tax Gain Scheme – 93 March 1993 16.32% 1.78
Principal Personal Tax Saver March 1996 16.42% 2.19
Franklin India Tax Shield April 1999 17.34% 2.10
Sundaram Tax Saver Nov 1999 17.73% 1.96
Sahara Tax Gain March 1997 22.31% 2.50
Reliance Tax Saver August 2005 15.14% 1.88

All data from Value Research

This list is not sorted in any particular order, and that’s deliberate because as soon as you sort something your brain tends to think of it as best to worst from top to bottom, but that’s not the case.

For mutual funds – the best mutual fund is the one that will give you the maximum return for your holding period, but since that’s in the future, there is no way to really predict which one will do better than the rest.

In the absence of that I compiled a list of long standing performers, and have presented you with that information, and if you think this criteria makes sense, then you can select one or two funds from this list for your investment.  

I will also recommend going to Value Research and doing some more research, and playing with their tools because they do have a lot of good tools in there.

158 thoughts on “Tax Saving ELSS Mutual Funds”

  1. The amount invested in ELSS MUTUAL FUNDS is locked for three years but I want to know whether the Tax benefit on this investment is given for the first year or for all the three years for which the investment is locked ? Kindly enlighten me.
    Thanks
    BHARAT

    1. Yes, a very good read, in fact it gives me an idea to do a post on all the good work Mr. Bhave has done, and in a tiny way recognize his great work.

  2. Hi Khurram
    You have invested Rs.50,000 in HDFC SL Crest. Answering a few questions would help you to understand the product.
    1. Do you know where your money would be invested predominantly? (Equity / Debt)
    2.If it is a pure equity product, do you believe that any company can give an NAV guarantee? (Yes / No)
    3.What sort of returns do you expect?(8%/10%/12%/15% p.a.)
    4.Did you go through the benefit illustration for charges?(Yes/No)
    5.Are you adequately insured? (Yes/No)
    6.Is the investment consistent with your risk/reward preference?(Yes/No)
    7.Do you know about term insurance policies?(Yes/No)
    ————————–
    Onto question two…
    Since you have mentioned that you can tolerate high risk, you should go in for ELSS. You can use the post and comments to shortlist a fund and invest in a staggered way over a period of time. For this F.Y. though, for want of time, you may invest in a liquid scheme and transfer Rs.1000/- per day through daily STP.

      1. Thanks Manshu
        Of late I find most insurance companies taking investors for a ride in the name of “Highest NAV guarantee plan”. Insurance Agents promise returns of something like 20%p.a. on these products. To provide the NAV guarantee, these schemes should invest predominently in debt meaning that you can expect returns in the range of 8-10% (not guaranteed!) alone excluding charges. If you include the charges, the returns are even less. And add to that, it doesn’t give any one sufficient insurance cover also. I would request you to do a post on these schemes so as to create an awareness among your audience.

        1. I don’t write about insurance because I myself am not interested in it. You buy one term plan and be done with it. What more is there to it, but I keep getting many emails about it, and I think it’s time I covered them in greater detail.

          Especially these crazy guaranteed products, let me write something about them in the coming days. Thanks Loney – pleasure, as always.

          1. I agree with you. I have only term plans. But, when i suggest term plans to my friends and relatives, they think i am not in my element to put some money for so many years to get nothing back at the end. I have seen people whose total insurance cover is Rs.1 lakh. I would wonder how grossly people have underestimated the cost of their lives.

            I would believe that the main culprit in all this is LIC of India, which all these years have built this image that insurance is for saving tax and make good returns off the money being invested. The lack of understanding in people that the insurance cover is a hedging mechanism against the vagaries of life is what needs to be taken to people.

  3. Hi Srini
    I am a 25 yr old media executive. And I have just started investing. Now the initial investment that i have completed is of Rs. 50,000 in HDFC SL Crest scheme. For the purpose of saving tax, I need to invest another Rs. 40,000. Please suggest what should I go for that would maximize my returns-long/short term. I am open to taking risks provided the expected return is worth it.

    Regards
    Khurram

    1. Dear Khurram,

      You can go for 2-3 ELSS since you want to invest before this financial year. It is better to go for dividend payout as from Jan-March every year the MF pay back the dividend. One fund which I would recommend is HDFC Tax Saver Dividend which is a consistent performer since a long time. The 2nd one you can go for Canara Robeco Equity Tax Saver as has given good returns since last 5 years. The 3rd you can chose is HDFC Long Term Advantage Dividend, which has recently given Div.of Rs. 4/-. Now since the NAV is less you can get more Units. The reason you choose 2-3 funds, so your risk is distributed.

      Regards,
      Vishal

      1. Dear Vishal,
        I would like to disagree with you on the point that NAV being less or No of units being more is favourable. In mutual funds, as far as i know, NAVs, No of units, dividend payout is is immaterial and never needs to be considered.

        1. Dear Loney,

          I would like to disagee on your point regd. NAV, Dividend Payout and No. of units. NAV does makes a difference. If you want to sell the units after 4-5 years or whenever you want and the nav is decreased, so there will be loss in that fund. You have to earn some Profit after certain period while selling the Fund. We have to look at the past trend also for deciding to invest in a Fund. All the parameters have to be taken care of while investing in a fund and also the investors main objective of investing.
          Vishal

          1. Hi Vishal,
            I think you got my point wrong. I said that NAV, dividend payout doesn’t make any difference because :
            1. Assume that you have two funds, one having an NAV of Rs.10/- and another having NAV of Rs.250/-. If you invest Rs.1000/- in both the schemes. You will be allotted 100 units in the first fund and 4 units in the second. Assume that both the schemes have identical portfolio and identical expense ratio. If there is a 10% return from the market, the NAVs of the schemes would be Rs.11/- and 275/- respectively. You will find that the market value is Rs.1100/- in both the cases. So, NAV is immaterial. You choose the right fund and invest whatever be its current NAV.
            2. With respect to dividend payouts, they are nothing but compulsory automatic redemptions. Say, you have 100 units of a fund having an NAV of Rs.25/- and the fund declares a dividend of Rs.5/-. Then, after the dividend payout of Rs.5/-, NAV would become Rs.20/-. Hence, dividend payout also doesnot matter in considering an investment.

  4. Brokerage firms will take a separate payment towards investment advice as brokerage. If the investment decision is yours, then why pay brokerage to such brokerage houses. You need to pay fee only towards any investment advice rendered by a financial planner. So, you may go directly to CAMS/KARVY/FTAMIL/Fund house office and make your investment as DIRECT.

  5. Thanks .. Loney !

    By the way , i have few doubts which require your clarification…
    1. is it beneficial to buy mutual funds thru brokerage firms like sharekhan and angel brokerage.. ? i heard they take commission which can be avoided if we buy mutual funds directly to the product sellers ?

    thanks,
    Srini.

  6. Hi shiva, can you throw some light on the new “Sundaram Tax Saver ” product with Doosra advantage that they are projecting in their ads .

    Thanks,
    -srini.

    1. Hi
      They only mean frequent dividend payouts. Dividend in a mutual fund is nothing but automatic partial redemption.

      Yes, Sundaram is one fund house that pays dividend frequently.

      *After dividend payout, the NAV of the fund will fall to the extent of payout

  7. Thanks.. Shiva !

    So it is based on this “long term capital gains” concept that we are getting tax exemption for ELSS and ULIP schemes.

    thanks,
    srini.

    1. Yes. You are getting tax exemption to ELSS based on this concept of Long Term Capital Gain.

      But, Returns from ULIP is non-taxable because, it is considered as a pay-out from an insurance company which is non-taxable. (Both maturity proceeds and claim benefits in mutual funds are non-taxable.

      1. I am sorry. The last statement should read …
        Both maturity proceeds and claim benefits from insurance companies are non-taxable.

  8. Hi All,
    Not sure this is a right medium to post this question. But i hope i will get a answer for my query 🙂
    1. If am buying and selling shares using my demat account and pan card , whatever money am earning will it be taxed end of year as my annual income. pls clarify.
    2. My wife got her own demat account and pan card number but she plan to use my bank account for buying and selling shares. will any profit she make added to my income end of year . pls clarify.

    thanks,
    Srini.

    1. Hi Srini

      According to the Prevention of Money Laundering Act, you are not entitled to make third party payments into your demat account.

      Any short-term capital gains you make is liable to be taxed at 15%

      Any Long-term capital gain you make is exempt from being taxed.

      1. Thanks .. Siva !
        By the way,
        1. if am not wrong. You mean, that i should n’t use others money to trade shares using my demat account. if this is the case, then how come the share brokers like sharekhan, angel broking lending money to their clients to trade shares.. ?
        2. on what basis one is classified as short term capital gain and long term capital gain. can u give some examples pls ?
        3. My wife got her own demat account and pan card number but she plan to use my bank account for buying and selling shares. will any profit she make added to my income end of year . pls clarify.

        thanks,
        Srini.

        1. Hi Srini

          1. Credit facility offered to you is considered as your own money.
          2. Gain on sale of share held for more than one year is considered as long term capital gain. Gain on sale of share held for less than one year is considered as short term capital gain.
          3. Money transferred from your account to your wife’s trading account will be considered as third party payment and the amount will be reversed back to your account. Gain from sale of your wife’s shares is not taxable to you

          1. Hi Shiva,
            i have few more clarification,
            1. This short term capital gain tax of 15% is in addition to the income tax for that respective financial (when am selling the share ) year is it .. ? pls confirm
            2. Do i need to pay the income tax for the long term capital gains .. ? pls confirm.

            thanks,
            Srini.

            1. Srini

              You will have to pay the short-term capital gain along with your incometax. You may give a declaration to your employer quoting your additional tax liability and inform them to deduct tax for this also.

              You neednot pay any tax for long term capital gains because it is totally exempt.

  9. Hi Ankit
    You will not be able to redeem in any of the ELSS schemes till the lock-in is over. You will have to wait till the lock-in is over to be able to redeem.

  10. Hi Manshu,

    I have invested in Principal Personal Tax Saver Fund & Can Robeco Eqty TaxSaver (G) fund, Both are ELSS funds now i wanted to know is there is any way that i can Redeem these fund and if yes what will be the consequences or the penalties…

    Regards
    Ankit

  11. I would like to suggest with a disclaimer the following funds. Again, like Manshu did, I would not put them in any particular order. I would try to classify them according to their risk-reward charateristic. I would also deal with this aspect qualitatively rather than use quantitative tools or ratios. The views expressed are my own and you may use your discretion to either accept or reject my views.

    Fund………………………………………………..Risk…………..Reward
    *HDFC Tax Saver……………………………..Medium…………High
    Canara Robeco Tax Saver…………………High……………..High
    *Fidelity………………………………………….Medium…………Medium (Conservative)
    *Franklin India Tax Shield…………………Medium………..Medium (Conservative)
    Birla Sunlife Tax Relief ’93……………….Medium………..High
    *Quantum Tax Saving Fund……………….Low……………..High (Value Investor)
    ICICI Pru Tax Plan…………………………High…………….High (Aggressive)
    Sundaram Tax Saver………………………V.High…………High (Aggressive)
    SBI Magnum Tax Gain…………………….Medium……….Medium

    * My personal favouites

    Typically ONE ELSS would siffice. In any case, never go for more than TWO funds.

    1. Hey Loney, What is the thought process behind this? I mean how did you narrow them down to these, and how did you classify the risk – reward?

      1. As I have mentioned, all the above observations are qualitative based on my experience with them during the last three years. I started my mutual fund investments with a very huge number of funds numbering TEN. And all the above funds featured in my portfolio. I had the opportunity of analyzing them during the downturn in 2008 because I was holding all these funds during the entire downturn and the recovery during 2009. It is based on these experiences that I classified them.

        1. Hi Smart Singh

          Since I was holding ten mutual funds at the same time, I found that i was wrong in doing the same. So, I have started reducing the number of funds in my portfolio and have already reduced them my half. Now, I am investing in only two funds and as soon as the lock-in is over, I would have only two mutual fund holdings. One Tax Saving and the other for regular investment.

          The only two funds I will have in my portfolio would be
          1. Quantum Long Term Equity Fund (Daily SIP)
          2. HDFC Tax Saver (Monthly SIP)

    2. Yes,
      I have the same question. Though I have a hunch that yours is a returns-based analysis. Because a holdings-based analysis would always have high-high or low-low relation for risk and rewards. Or else you need to have a very strong view on the sectors or holdings in the portfolio.
      But then returns-based analysis is backward looking.

      And I’m sorry but I totally disagree with your statement that ‘never go for more than TWO funds’. It totally goes against the spirit of risk reduction and diversification. I always advice newbies to invest in 5-10 mutual funds.

      PS: The risk of a value investor is usually very high and it takes character, conviction and deep pockets to be one.

      1. With regard to diversification, I believe that a mutual fund itself is a diversified vehicle diversified across various sectors and and market caps. Typically, a mutual fund holds 50 stocks. Holding a very large number of mutual funds will make it so diverse that the portfolio tend to behave like an index fund. It would be better to go for an index fund whose expense ratio is very much less than actively managed funds.

        1. My last statement means that too much diversification in mutual funds would mean that your portfolio would never beat the market by much and therefore its return would more or less reflect the broader market. If you want to track the broader market, index funds are the best alternative because of low expense ratio.

          With regard to first time investors, probably, they must start with a balanced fund -> Index Fund -> Activele managed large cap or large-mid cap fund

      2. Could you please elaborate on what you mean by holdings based analysis, and the inference that it will be have a high – high or low – low relation for risk and reward?

      3. Hi

        I would like to clarify that even-though theoretically risk-reward should be high-high or low-low, we find that funds deviate from theory by a long way. If theory holds good, all funds would have the same Sharpe Ratio. But, we find that the sharpe ratio, which tells you how much your fund reward you for each quantum of risk taken, varies from fund to fund. This may be due to Faulty Assessment of Risk by a Fund Manager. There are funds that take undue risk to reward you. These funds usually take more risk than they reward you with. Such funds will have the least Sharpe Ratio. Funds that take weighted risks and reward investors handsomely have very high sharpe ratio. Any fund manager who sees fundamentals rather than momentum to pick stocks will do much better because the risk he has taken would be justified over the long term. Whereas momentum chasers (they call themselves high alpha and high beta fund managers) will find that when the momentum suddenly loses steam they are nowhere.

        I also beg to disagree with you on the fact that value investing is risky.
        Because, A value investor
        1. Takes the whole investment universe.
        2. He short-lists only the companies that are sustainable in the foreseeable future
        3. He then eliminates all richly valued companies and picks companies whose price can be justified on the basis of fundamentals.
        4. He chooses an appropriate entry price and an appropriate exit price.
        5. He enters the stock only below the entry price(attractive valuation) and exits as soon as the exit price(rich valuation) is reached.
        6. He is never afraid of holding cash if the valuations are not attractive.

        Since the price you pay is always justified, this is the method of investing where the risk is the lowest. Since you enter the stocks at appropriate price points and exit at specified price points. Such portfolio more-or-less resemble a PE-Fund. The only important thing is that you should stay for the long term usually 5 years or more. Though this time period is valid for all equity investments, it is more so with value investing.

    3. Dear Sivaramakrishnan,

      One fund which is missing in the list is HDFC Long Term Advantage Fund which I have been investing since 2006. It is consistently doing good also at present. It is better to go for 2-3 funds rather than 5-6 funds. SIP is the best way of nav averaging, rather than lumpsum investment.

      Vishal

  12. Manshu,
    You should also have listed younger funds with good 3 year returns. For example, Fidelity Tax Advantage Fund is doing consistently well for last couple of years. And it’s a world-renowned brand. Maybe it deserves a place in a top 10 list of ELSS.

    1. That’s not the way I think, and personally I value a long track record much more than world – renowned brand, or whatever, so that’s the way I’d go about narrowing my options.

      1. Manshu,
        Investing is more of an art than science, and everyone has different beliefs. I just wanted to indicate that a strict filtering is not always the best option. The fund in question is 4 years and 10 months old and does not qualify in your list in spite of having a good track record.
        And as I said above, good brand is often a decent proxy of people, process and ethics, just like you believe long track record is.
        I really like your list otherwise. And the best way to go forward would be using a dice 🙂

  13. Hi Manshu,
    Goodday to you !
    I like your advice on my case below…
    i have a LIC Money Plus ULIP policy. i have invested 80K per year since 2007 for tax benefit under 80C.
    3 yr lock in period is over. i have gained only 5% returns per year, its current price is Rs-12.89. This prices is fluctuating proportinately based on the BSE index. i have sold less than half of my units for an emergency need.
    In this case , can i continue investing in this product and book profits by selling units when the markets are doing well.
    or would you suggest me to surrender this product and start a fresh investment… ? pls let me know.

    here are my other queries.
    1. in case if i continue investing in this Money Plus ULIP product will i get the tax benefit under 80C till 2027 till this policty matures.. ? because there were some speculation that i will lose its tax saving feature once DTC ( direct tax code ) come in to effect. pls advise.

    2. If you suggest surrender this product what are the other products you would suggest me , which can help me as a tax saver in the first place and then give me a good return.

    thanks,
    Srini.

    1. Srini,
      Your question is a tough one for any financial planning. I’ll try my best to simplify the answer.
      The ULIP you bought was a front-loaded product. Which means they deducted a huge chunk of your first year premiums in different charges. These type of investments only give you a respectable return if you continue for more than 12 years. Because they won’t deduct that much from your premiums after 3 years. Now if you had invested something like 15-20K per year, you should have continued.
      But 80K per year is a huge commitment and continuing it would be like ‘throwing good money after bad’. I’d recommend you surrender this product. And here are the reasons:
      1. Suppose you had chosen 50% equity option in this ULIP. Now if you invest 40K in PF or PPF and 40K in equity mutual funds, you’ll get much higher returns in this combo.
      2. Their is no commitment to invest every year. Its a big relief.
      3. Yes, ULIP dividends will be taxed after 2012, thanks to DTC.
      4. Take advantage of ELSS mutual funds because they’ll be gone after DTC comes in.
      Let me know if you need more clarification.

      1. Thanks for your advise.. Singh !

        by the way ,

        1. Mine is a growth fund with a pure life cover bundled, am not sure about the equity % in it.
        2. I heard the ULIPs which are launched before DTC lauch would continue to enjoy the tax saving feature even when you are closing it. The dividents will be taxed only for the products launched after DTC comes in to force.
        3. The PPF is not attractive because of the 15yr lock-in.
        4. pls suggest me couple of ELSS products to invest.

        Thanks,
        Srini.

        1. 1. For a growth fund, I’m guessing they would have around 50%-60% equity. If your horizon is more than 15 years, you should have around 70% equity and enjoy the fruits of India Growth Story.
          2. My bad. Yes, the latest draft exempts the existing ULIPs.
          3. PPF, in fact, has the shortest lock-in of all products which will be fully tax-exempt (EEE) after 2012, assuming you are less than 40 year old.
          4. From the above list, I’ll probably choose the 3 funds with lowest expense ratio. They turn out to be Reliance, SBI and HDFC. There are reputed companies. Past returns should be used for filtering and not selecting.

          1. Hi Smart Singh

            I would like to differ from you wrt reputed companies. I donot believe in the reputation of companies. Fund management is upto the team to deliver the goods to the investors. An ethical fund management team which is disciplined in the process of investing will do wonders rather than large corporate brand names.

            1. Hi Siva,
              Great Point! Thanks.
              Agree that it’s not necessary that reputed companies would not give better returns. But in absence of any other information, in my opinion, it’s a good enough proxy for ethics, people and process.

              Also, if not for selection, it’s a good parameter for filtering. In my recommendation above, they just happened to be established fund houses. It was not the basis of recommendation.

        2. Hi

          I wouldnot answer your question with regards to ULIP because I am a die-hard hater of these parasitic schemes.

          With regard to the other question
          You should decide the scheme yourself based on your risk tolerance

          When choosing ELSS products, you should first know your risk tolerance.
          1. If you donot have risk tolerance, ELSS is not for you
          2. If you have a small amount of risk tolerance, you should go in for Large Cap oriented ELSS funds
          3. If you are risk averse and you completely understand the nuances of investing in ELSS schemes and you want higher returns, go in for mid-cap oriented ELSS fund

          If you ask me, I would go in for Quantum Tax Saving Fund because, I like their principle of investing and their work ethic. This is definitely not to be considered as a recommendation.

  14. Dear Manshu,

    Appreciate your work . need some help please. for the infra bonds, I was tweaking around with ICICI direct ( i have indiainfoline account also). By a silly mistake i blocked 2 units of IDFC worth 10,000 Rs. I wanted to block 20,000. Now the ICICI direct system is not allowing me to invest additional amount. I need to submit investment proofs in the company in a day. Can you please help me here?

    SMiles
    Aditya

    1. It seems to me that you’ve bought bonds worth just Rs. 10,000 and now since the subscription is closed you aren’t able to buy more. Quite frankly, I don’t know what you could do in this situation apart from waiting for another issue that comes up. Sorry, couldn’t be more help.

  15. Hi Manshu

    I am becoming a great fan of your blog. I liked the way you scrambled the funds not to put it into any particular order. Good Going man!

    I would like to add a few points :

    1. ELSS would be available for the F.Y.2011-12 also since DTC comes into effect only from F.Y.12-13
    2. Tax Planning should start in the month of April and should continue through the year and should not be concentrated during the last quarter alone.
    3. Choose your fund on the basis of the process followed and not on the basis of past performance or on the basis of the fund house or on the basis of a star fund manager (Most well managed funds are those that are little heard of. The Best managed Equity Mutual Fund Scheme is actually the smallest equity fund in India). The Best best would be funds that follow the bottom-up principle of stock picking and those who believe in the value-investing philosophy (Buy lower and sell higher) of Warren Buffet (rather than the other way around).
    4. Don’t go for funds that have a very high churn ratio because part of the returns is spent on brokerage and trading charges
    5. Invest Systematically. If possible go in for a Daily SIP or a Weekly SIP. I personally donot like lumpsum investments.

    Happy Investing!

    1. Thanks Loney – where can one see the churn ratio? Is it available on sites like Value Research or just with the individual fund website?

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