The risk is one of the most important factors while you invest in ELSS mutual funds. Unlike any other mutual fund, you don’t have the option to get your money back anytime. The money is locked for 3 years in the tax saving mutual funds. Due to this restriction the risk of mutual fund becomes a more important factor. Due to this factor we can’t make the ranking of the best ELSS mutual funds purely on the basis of performance. Among the many qualities of best tax saving mutual fund the risk is most prominent.
Indeed, the ELSS should carry the least risk among equity mutual funds. Since tax saving mutual fund should primarily invest in share market, we have to face the risk of the share market. Share market will not rise continuously so that the ELSS. However, there are some other risk is also associated with the tax saving mutual funds
Types of Risk In An ELSS Mutual fund
The market risk carries the most weightage in a tax saving mutual fund. As I have told, the ELSS mutual funds primarily invests in share market. The market condition changes with the economic condition of the country and world. Also, government policies and news play part in the movement of the share market. Due to these unpredictable factor the movement of the share market is also unpredictable. A bad sentiment with bad condition can send the share market into dizzy. While all round enthusiasm can send it to the peak.
The Equity linked saving schemes also follow this market trend. An ELSS can’t escape the bad market sentiments. However the impact of ups and down can be minimized by using the suitable strategies. These strategies can make an ELSS more or less risky mutual fund.
What if you want to sell the mutual fund in a falling market, but there are no buyers in the market. What if you want to sell the ELSS units in a market rally, But you are unable to sell it. The risk of getting trapped in a mutual fund investment is called the liquidity risk.
You can find liquidity risk with many penny stocks. Such stocks don’t have any buyer in a falling market. Fortunately, you need not to find a buyer for the tax saving mutual fund. The mutual fund company is bound to buy back your ELSS units at the prevailing price. But the lock in period of ELSS mutual fund puts you on another type of liquidity risk. In an ELSS you get trapped for 3 years. Please keep in mind while you invest in tax saving mutual fund.
The credit risk is the default risk of the company. Due to the strict regulation, it is nearly impossible. A mutual fund company rarely defaults as it puts all of its money in the shares or bonds.
However, a bond issuing company may default. Hence, there is a credit risk on the mutual fund schemes which invests in corporate bonds. Since ELSS invests in share markets, there is a very little credit risk.
How Risk Is Measured in A Mutual Fund
To gauge the risk of an ELSS, we have to go through the historical data. The historical data give us insight about the behavior of mutual fund schemes. The researchers have devised many indicators to analyze the risk of the mutual fund scheme. Let us learn them in brief.
No Risk, No gain. This is an old saying. Generally, in the investment, people expect more return as the risk increases. But, is the return directly proportional to the risk? Not always. In spite of big risk a mutual fund may not give the expected risk.
The Alpha measures the difference between a fund’s actual returns and its expected performance. The expected performance is based on the risk. The risk in a fund is measured by the Beta.
A positive Alpha means, the fund have given greater return than the risk taken. While a negative Alpha tells that the fund has taken more risk, but gave less return.
Useful Calculator: Compound Annual Growth Rate (CAGR) Calculator
You must prefer a fund which gives the highest positive Alpha. These are the top Five ELSS funds on the basis of Alpha.
Top 5 ELSS on the Basis of Alpha
|Axis Long Term Equity Growth||14.09|
|Reliance Tax Saver (ELSS) Fund Growth||10.31|
|Birla Sun Life Tax Relief 96 Growth||9.1|
|Religare Invesco Tax Plan Growth||8.8|
|BNP Paribas Long Term Equity Fund Growth||8.48|
Beta is a measure of the volatility in comparison to the benchmark index. If a fund swings more than the benchmark index, it gets riskier. The fund, which swings less than the benchmark index is considered safer. The benchmark index has the Beta of 1.0. If a fund has the beta of more than the 1, it is considered risky. The opposite is safer. The Beta of 1.2 means that fund is 20% more volatile than the benchmark index. The Beta of 0.85 means hat the fund is 15% less volatile than the benchmark index.
Below is the list of top 5 ELSS Fund, which have the least Beta.
Top 5 ELSS Which Have Least Beta
|Edelweiss ELSS Growth||0.8|
|Franklin India Taxshield Fund Growth||0.87|
|Axis Long Term Equity Growth||0.89|
|LIC Nomura MF Tax Plan Growth||0.89|
|BOI AXA Tax Advantage Regular Growth||0.89|
The standard deviation tells us the deviation of the fund return from its mean return. It does not take account of the benchmark index. A Zizag return graph of fund would have the high standard deviation, while a smooth graph would have the low standard deviation. A fund which has the low standard deviation is considered more reliable.
Top 5 ELSS with Least Standard Deviation
|Edelweiss ELSS Growth||12.78|
|Franklin India Taxshield Fund Growth||13.48|
|UTI Equity Tax Savings Plan Growth||13.54|
|BOI AXA Tax Advantage Regular Growth||13.58|
|LIC Nomura MF Tax Plan Growth||13.7|
Like Alpha, The Sharpe ratio also measures the risk-adjusted performance. But the Sharpe ratio also takes account of the risk-free rate of return. To get the Sharpe ratio, Risk free return is subtracted from the rate of return of the fund. The result is divided by the standard deviation of the fund.
The Sharpe ratio is considered more accurate as it also considers the risk free return. One can get a risk free return by investing in government bonds. Therefore, the return over and above the risk free returns is the actual gain corresponding to the risk taken.
The greater a fund’s Sharpe ratio, the better its risk-adjusted performance.
Top 5 ELSS Which Have Highest Sharpe Ratio
|Axis Long Term Equity Growth||1.75|
|Religare Invesco Tax Plan Growth||1.33|
|Birla Sun Life Tax Relief 96 Growth||1.33|
|BNP Paribas Long Term Equity Fund Growth||1.32|
|Birla Sun Life Tax Plan Growth||1.29|
Take The Final Decision
The risk of an equity linked saving scheme is equally important as the return. But sometimes people tend to focus only on the return of equity linked saving scheme. People decide an ELSS only by looking at the ranking, which is based on performance. If you want to select the best ELSS, you must assess the risk of the fund. However, you may have some confusion after reading all the above parameters. Every parameter has its own advantage and disadvantage. But for a newbie the Sharpe ratio is almost a perfect measure to assess the risk factor of the tax saving mutual fund.
In this count Axis Long term equity Fund is the best ELSS. You can also read a comparison of Axis long term equity fund with other top ELSS.