Best equity linked saving scheme (ELSS) should give you a wealth in the long term. Best ELSS should be a scheme which gives you peace of mind. You need only these two thing from an equity linked saving schemes.
A mutual fund scheme may be best for a class of people, but it may not be the best for other class of people. Similarly, a top equity linked saving scheme may not be suitable for you. A fund manager may give extraordinary returns, But he may not be your best choice. The ELSS investor is not the common equity mutual fund investor. We have to understand his wishes and needs to identify the best mutual fund for him.
Most of you want to invest in ELSS mutual funds primarily for the tax saving. You want a better return than a PPF account, tax saving FD and NSC. But it does not mean, you are ready for high risk. You want the benefit of equity along with tax saving. That is it. You don’t want a thrill with your investment. You want a solid investment.
An ELSS is not like any other diversified equity mutual fund. It should have greater provision for safety. Also, it should give a good return in the long term. Let us learn what should be in a best tax saving mutual fund (ELSS).
Top Attributes Of Best Equity Linked Saving Scheme
1. Good Long Term Performance
Everyone wants a tax saving mutual fund scheme which is consistent. It’s performance should not be a flash in the pan. The ELSS should perform consistently during 3 to 5 years. But, should you buy a mutual fund scheme which is a top performer during last three years or five years? Should you visit a fund comparison website and just pick the top ELSS of 3 or 5 years?
No, and never. The performance ranking of equity linked saving scheme during 3,5 or 10 year does not give the complete picture. Sometimes, it may be deceptive as well. Let us understand this through a real example.
Axis long term equity and Reliance tax saver are the top performing tax saver mutual fund scheme during last five years.
In this period Axis long term equity fund has given 24.5% annualized return while reliance tax saver fund has given 22.5% annualized return. You can see there is no major difference between both of the funds. According to this data, you can choose any one of them.
Also Visit: ELSS Return Calculator
Now let us see the annual performance during last 5 years in the chart. The chart shows the return of the both fund in each quarter. It shows how the return of both the mutual fund varied in each quarter.
This chart shows the complete picture. You can see both of mutual fund schemes has gone through the different paths. There were ups at the time of the market rise and downs at the time of the market fall. It is a natural path of any equity mutual fund. But Reliance tax saver fund has gone through the wild swings. The Axis long term equity is not as much swinging as reliance tax saver.
Looking at this chart, which funds should be your choice the wild one or the smooth one? Naturally, it would be the smooth one. The less the swings more the peace of mind.
To choose the best ELSS mutual fund we need to choose a fund which have been the best performer among its peers in all the circumstances. There is a methodology to find such mutual fund scheme. let us understand this selection process.
- Rank all the mutual fund scheme in every quarter on the basis of performance.
- Pick the top 25% mutual fund schemes from the ranking of each quarter. This top 25% is called the top quartile.
- Now select those mutual fund schemes which were common in the top 25% of every quarter.
The selected schemes would be best schemes in all the circumstances.
2. More Return With Less Risk
The common investor of ELSS is not the typical share market person. If it is not the benefit of tax saving, he/she may avoid investing in equity mutual funds. The common investor of ELSS can’t take big risk. The lower the risk, more relaxed he is.
For you, the safety of your money is more important than high return. Hence, you need a tax saving mutual fund which don’t fall much, if market crashes.
To measure the risk of mutual fund, A technical term ‘Beta’ is used. Beta tells the deviation of a scheme corresponding to the benchmark index. Lower the beta, Better the fund. There are examples of some low beta (low risk) ELSS. Note these funds are listed here purely on the basis of risk associated.
|Edelweiss ELSS Growth||Low||13.49|
|Franklin India Taxshield Fund Growth||Low||13.85|
|Union KBC Tax Saver Growth||Low||13.54|
|UTI Equity Tax Savings Plan Growth||Low||14|
Also Read: Top 5 ELSS On The Basis Of Risk
3. Experienced and Talented Fund Manager
A fund manager and his team make a tax saving mutual fund scheme the best. Fund manager is solely responsible for the fund performance. If Fund manager of a good equity linked saving scheme stays with the scheme, you can expect similar performance in the future as well. But, if fund manager is changed recently, the performance of the scheme may deteriorate.
There is a very prominent example to prove this point. Till 2008, SBI magnum tax gain was the best tax saving mutual fund. Sanjay Sinha was the star fund manager of this scheme. After he quit the fund house, the SBI magnum tax gain deteriorated swiftly. The scheme never got back its glory.
Therefore In A best mutual fund, fund manager should not change.
4. Reputed Fund House
Suppose you choose a best ELSS. It is a ‘low-risk good return’ fund. The star fund manager is also consistent with company. But after one year of your investment the fund manager suddenly switches the job. Unfortunately, you can’t switch the fund house as your money is locked for 3 years. Therefore, you will be forced to continue with the fund house. This may result in heavy loss.
In such situation, the fund house ideology and principles come to rescue. If your fund house is a professional and reputed company. If it has built a system of mutual fund research, you can be assured. The professional fund houses have developed the systems of investing so that dependency over fund manager comes down.
5. Sufficient Asset Under Management
Asset under management is the total corpus of investment. Asset under management is the value of total investment in a mutual fund scheme. The more people invest in a scheme, The AUM becomes bigger.
Big corpus of an equity linked saving scheme has some advantage.
- The fund management company has more money to spend on the research and pay to the fund manager.
- The fund can invest most of its AUM. It needs less percentage of AUM as cash.
Hence, to be a best ELSS, the mutual fund scheme should have sound asset under management. Any mutual fund scheme which has AUM more than Rs 1000 crore is considered good. There are around 20 schemes, which have more than Rs 1000 AUM. I am giving the names of top 15 ELSS on the basis of AUM.
|SBI Magnum Taxgain||53,933|
|Reliance Tax Saver||41,557|
|Axis Long Term Equity||40,342|
|ICICI Prudential Tax Plan||24,118|
|Birla Sun Life Tax Relief||19,037|
|Franklin India Taxshield||17,056|
|L&T Tax Advantage Fund||16,479|
|Sundaram Tax Saver||12,685|
|HDFC Long Term Advantage||12,269|
|DSP BlackRock Tax Saver||11,271|
|Canara Robeco Equity Taxsaver||9,297|
|UTI Equity Tax Saving Plan||5,781|
|Kotak Tax Saver||5,155|
|Principal Personal Tax Saver||3,864|
6. Healthy Portfolio
A tax saving mutual fund scheme which comprises blue-chip companies would be more stable. The big companies are considered more sound. They can easily bear the bad market condition. They have the enough cushion of cash to navigate in the troubled waters. Therefore, an investment in big companies is always considered safer. For you, the best ELSS is the one which can give you the assurance of greater safety.
You can go through the portfolio of the mutual fund scheme to get an idea of investment. Also, you can visit mutual fund research websites such as morningstar and value research to study the style map of the mutual fund schemes.
A style map tells you the investment preference of a mutual fund scheme. Look at the style maps from morningstar. In this map, top squares represent the investment in big companies and bottom the mid and small companies. Hence, an investment eclipse on the top portion would be better. You can see Axis Long Term equity is mainly concentrated on the top portion of style map. This scheme mainly invests in big companies.
On the other hand, Reliance tax saver has spread its portfolio till the small cap. The inclusion of small-cap companies in the portfolio has made the Reliance Tax saver volatile. The graph given above shows the volatility of Reliance Tax Saver.
7. Less Total Expense Ratio
Expense ratio may seem a minute part of the investment. But it pinches when the market is not so good. It pinches when you get less than 10% return in a year. It pinches more when there is a downfall and you portfolio value goes down. Note, Fund management company charges expense ratio every year.
The expense ratio is all expenses incurred by the fund management company. Fund management company pays salary to the fund manager and research team. It also spends on marketing. It gives commission to the agent. The total expense on fund management is taken from the asset under management. However, SEBI has fixed the percentage limit on the expense ratio. A mutual fund scheme can’t charge more than 3% of the fund as the total expense ratio.
There are some mutual funds which charge far less than 3%. Quantum Long term Equity has only 1.25% expense ratio. However, you should consider an ELSS for investment on the basis of expense ratio, If all other factors are same. This is the list of some mutual fund schemes which charges low expense ratio.
|Quantum Tax Saving||1.25|
|SBI Magnum Taxgain||1.54|
|Birla Sun Life Tax Savings||1.56|
|ICICI Prudential Tax Plan||1.63|
|Franklin India Taxshield||1.68|
|LIC Nomura MF Taxplan||1.70|
|ICICI Prudential Tax Plan||1.72|
|Birla Sun Life Tax Relief||1.73|
|JM Tax Gain Fund Growth||1.79|
Did you decide the best tax saving mutual fund for this year’s investment? Do your ELSS passes on these parameters? What is your opinion about the best ELSS. Share with us.