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. Hello all,
    My name is Hari, its been one year since i joined BHEL…
    Im having some confusion with my investments…I m planning to quit my job after a year or 2 and go for higher studies… So I am interested in investments where “if required” i must be able to use the money at anytime….

    1) I am looking into Gold, RD, mutual funds as few options… however would a recurring deposit at bank be an attractive one…..i just felt that investment should be diverse and an RD wud be safe though the interest is just 9%

    2) This last year i had saved money in VPF (my company’s voluntary provident fund) for tax exemption and for accumulating money to pay the bond amount for company when i quit….now tht the amt has accumulated….I do not know whether i shud divert money away from VPF or stick to it….
    VPF will however be taxed if i stop before 5 years but atleast i can take my money out unlike PPF or NSC

    im looking into ELSS and postal life insurance where lock in is only 3 years

    Please help me out …

    1. If you want the money at any time then I would only suggest safe instruments where your capital is protected like RD or FD or Post Office deposit and other stuff like that. The reason is that the stock market is volatile and it may happen that the market is down when you need to cash out, and you have to sell at a loss. You should only invest that amount in the stock market that you don’t foresee using for a long time frame.

  2. Hi to all of you,

    I am a student MBA from Pondicherry University,M doing my project on the topic”Comparision of ELSS scheme of various fund houses”

    I need some guidance from all of you,please guide me on which basis i can compare the funds of different fund houses.
    I have selected some points like……Beta,Asset allocation,Expense ratio,Sharpe ratio
    Pls tell me some more point on which i can compare the funds

  3. Hi Friends,

    I recently have completed my education and started working. Need to show up some investment for claiming tax benefits. I am thinking of going for ELSS option apart from NSC.
    Can someone plz help me on exactly how to invest in these funds. Do i need to approach a
    broker or is there some direct way to invest in them.
    Waiting for an informative response.

    1. The direct way is to approach the fund of your choice and have their rep come to you. If you have an online trading account already like ICICI DIRECT then you can use that to buy MFs as well.

  4. Hi Sir,

    My query is related to SIP, I have just completed my lock in period of 3 years ,
    I have HDFC tax saver fund- folio 5112284/12.
    I want to redeem all the available units but my advisor says that I can’t due to sudden change in rules, is it true? if yes then what are my options to redeem whole units.
    Please revert through email.

    Thanks,
    Brij

    1. Hi

      Since you are investing via SIP, each installment has a lock-in of three years. Say, you have started your SIP for Rs.5000/- in April 2008. So, while your very first installment has completed a lock-in of three years this April, your very recent installment in April 2011 would complete its three year lock-in only in April 2014.

      1. Dear Loney,

        Thanks for your inputs, need to know since when this new policy is introduced as my friend started a month earlier then me and got all his units redeem last month only.
        We both are investing through same medium (SIP) and for same Tax saver fund.

        Regards,
        Brij

        1. Dear Brij,

          It is highly improbable that your friend redeemed all units if he continued with his SIP all these years. Because the rules for ELSS schemes were never changed since they were introduced in 1993.

  5. Hi, Good evening all,

    I have an SIP of Reliance tax saving MF, now I am planning to go for another sip, can you pl. suggest me which one is batter? Is HDFC Tax Saver & HDFC Long Term Advantage Fund are difference? can I go with any of them?

  6. hi,,,,,,i m planning for tax.Recently i have come to know that i can invest viaELSS
    and can get tax benefit.Plz suggest what homework can i do before selecting a suitable Fund moreover i seek ur guidance in choosing funds. Plz help n tell me criteria.

    1. Hi Gauri – The tax benefit you get from ELSS is that up to a lakh gets deducted from your taxable salary and that reduces your taxable income by that amount.

      Before you select a fund you can look at its past performance, size, expense ratio. You can select a fund from ones in the list given above based on these parameters and please feel free to ask any more questions that you may have.

  7. Hi,
    I have taken SIP of 1000 Rs in SBI MSFU for 3 years , will get tax reedemption under setion 80c tax saving scheme.

    1. Hi Arvind – the tax benefit will only accrue for the investment you make for this fiscal (acc. to current rules). You may want to rethink your SIP if it spill over to 2012 financial year and the rules don’t change.

  8. Hi All

    I would like to add something more….

    If i go for the SIP mode on investing a ELSS bond which has 3 year lock in period, before DTC comes into picture,i will be getting tax benefit for this year.will i be getting the same tax benefit once DTC comes into live for the next two years?

    1. The tax benefit will be applicable only for this year. Whatever you invest in from next fiscal won’t be counted towards any tax breaks.

  9. hi
    coming on the business, i am a central government employee, aged 26, and monthly income of 32000/
    in this regard please answer the following queries-

    (1) i want to invest in ELSS to save taxes, but as i came to know from your publications that these
    schemes has a lock- in period of three years, and after DTC these schemes will become irrelevant.
    if i invests one of these schemes in FY 2011-12 for one year and after it, put it in a cold bag. what
    would be the effect of three year lock-in-period on scheme?

    (2) i want to invest Rs. 15000/ month in mutual fund through SIP for long term (20 years) please suggest me desired
    portfolio. i already invests in PLI endowment Rs 2350/ month, and RS. 3000/month deducted from my
    salary as NPS, and CGEHS also deducted from salary.

  10. Hi, I want to invest around 6k per month in 3 Mutual Funds that provides Tax saving. I want to do SIP of 2k each. Can you please provide me the best Tax saving Elss schemes of 3 Mutual funds where i get good returns?

  11. I have little knowledge on mutual funds but I was thinking of investing in HDFC Tax Saver mutual fund. On advise from friends, I decided to do some study. I have been checking the NAV of this fund for some time now (few months) and see that it is going down. What does that signify? Will it recover in the long run? Since these ELSS have a lock-in period of three years, it gives little opportunity for the investor to do anything with the investment for three years. Is there some guarantee that after three years, funds like HDFC TS will be doing good?

    1. The NAV is decreasing because the markets are going down. This should not be a reason for worry. The HDFC Tax Saver fund is a very good fund. ELSS mutual funds have the potential to earn you inflation beating, broader market beating returns. Realistically 12-15% p.a. can be expected if you invest systematically taking the SIP route. But, no one including the company is allowed to guarantee the principal as well as the returns from the scheme. So be it.

    2. Sridhar – Loney has already pointed that out but let me also reiterate that as far as equity is concerned there are absolutely no guarantees, and if you make a loss then that’s yours to bear.

      If you’re not comfortable with that risk then please opt for safer debt instruments.

  12. A very simple query – If i make an ELSS investment before DTC kicks in would i continue to get tax benefit on the ELSS scheme that was launched before DTC code comes in even after DTC code kicks in ??

    1. Nishant – The tax benefit is that the amount of investment is reduced from your taxable income, so if you make that investment in this year or the next – it will get deducted from your taxable salary and you will get the benefit.

  13. Dear all,
    I understand that its been quite late now, but can anyone advise what are the tax saving investment options available under ELSS for this year, with high or medium returns of course? and what is the lock in period for these ELSS?

    Also would it be worth while to divide Rs. 50,000 in smaller chunks and invest in multiple other secure options like tax saving fixed deposits?

    Pawan

    1. Not quite sure about what you mean by tax saving instruments under ELSS – mutual funds that come under ELSS? All the MFs listed in this post will get you 80C exemption.

      When you say high or medium returns – the side of the coin is risk so please consider that in the equation as well 🙂

      3 years is the lock in period for ELSS.

      Where you invest should primarily be dictated with how well diversified you are. So if all your investment is in shares then one big market fall can wipe out a significant part of your savings. If all your money is in FD then you are not going to make a lot more than inflation in the long run, so that question is a bit more involved than can be answered by anyone in a comment.

  14. Please intimate whether amount received for encashment of earned leave on retirement from govt service is taxable during 2010-11.

  15. Good evening Every buddy,

    I dont know what is ELSS & SIP ?What is mutual fund?

    I want to invest 30000pm for 15-20 years?

    Please email me how could i get maximum benefits.

    please ex-plane

    vikas

    1. Vikas – these are quite detailed topics that can’t be explained in a matter of an email or an article. You will have to do a little bit of research on these topics on this website and others as well.

      There is no such thing as “maximum benefit” and no magic bullet. Everything has risk and rewards which you will have to understand, and act accordingly.

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