In my last post, I listed Top 10 Best SIP Mutual Funds to invest in India in 2017. Now I am listing here the Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017.
Before proceeding further, let us first understand the returns of the funds which I recommended last year.
You noticed that since one year Axis Long Term Equity Fund is the only fund which underperformed to it’s benchmark. Rest of the funds are way ahead. This may be due to the style the fund adopted and the benchmark it set against other funds.
What are ELSS or Tax Saving Mutual Funds?
- ELSS (Equity Linked Savings Scheme) or Tax Saving Mutual Funds are the special funds which are meant for tax saving purpose under the Sec.80C of IT Act.
- Lock-in period of ELSS or Tax Saving Mutual Funds is 3 years. This is the lowest lock-in period among all tax saving instruments you invest. However, do remember that each investment (monthly SIP) is considered as fresh investment. Hence, such each investment or monthly SIP must complete 3 years for liquidating. Let us say you started the monthly SIP on 1st January, 2017, then the first SIP will be eligible for withdrawal after 3 years completion means after 1st January, 2020. Same way 1st February, 2017 SIP will be eligible for withdrawal after 1st February, 2020. It will continue like that. Never be in wrong belief that one year SIP in ELSS funds means after 3 years can withdraw FULLY. You have to wait for fourth-year completion to completely withdraw the amount.
- ELSS falls under EEE tax rule (Exempt-Exempt-Exempt). There will be no tax during investment, no tax on whatever you earn and no tax at the time of withdrawal. This includes the divided declared from such funds are also tax-free in the hands of investors.
- The monthly investment required is as low as like Rs.500. There is no maximum limit. But the maximum tax benefit under Sec.80C is Rs.1.50,000 as of now.
- All ELSS or Tax Saving mutual funds will not have same investment mandate or never feel that they all invest in same stocks or sectors. Based on the fund mandate, they have rights to invest accordingly. Hence, you must understand the fund portfolio before jumping into investment.
- Never invest in ELSS or Tax Saving mutual funds with the intention that after 3 years you can easily come out investment with POSITIVE returns. This is the equity product. Hence, enter into such products only if you are ready to wait for more than 5 years or so.
- Tax Saving ALONE will not be your motive to invest in such products. You must have a proper financial goal in mind and along with that proper asset allocation a MUST. If you are unable to do that then it is a sheer waste of investing randomly.
Why you have to invest in ELSS or Tax Saving Mutual Funds?
# You must have long term holding period to invest (strictly not less than 5 years).
# You must invest in such funds only if you have a proper financial goal.
# You must do the proper asset allocation between debt and equity or among other assets based on the time horizon of your financial goal.
If the goal is below 5 years-Don’t touch equity product. Use the debt products of your choice like FDs, RDs or Debt Funds.
If the goal is 5 years to 10 years-Allocate debt:equity in the ratio of 40:60.
If the goal is more than 10 years-Allocate debt:equity in the ratio of 30:70.
# You must have proper return expectation of your OWN before jumping into investment.
# You must know what is your portfolio return expectation when you combine both debt and equity.
# Finally, if you are feeling the shortfall in tax saving benefit under Sec.80C limit.
Notice that I gave the priority of tax saving the LEAST. So understand first then jump into investment.
How I selected Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017?
I will first screen the top 15 funds based on their returns to benchmark since inception. The funds who consistently beaten the benchmark are listed in that 15. Once I have the list in my hand, then I select the funds based on Risk-Return Analyzer.
Many simply select the funds based on eye-catching returns. However, at what cost the fund is giving you a better return? To what extent it protects my investment during a downturn is what differentiate from good fund to bad fund.
I used Freefincal’s Mutual Fund Screener tool to shortlist the top 15 funds in each category.
Again, I am not saying that these 5 funds alone be considered as “Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017”. There may be fewer other funds, which are good to compete with these funds. However, I may be biased towards few Mutual Fund Companies (purely on their size and how long they are in MF business in India). Below are the metrics I used to arrive at finally selecting the funds.
If the fund cleared all these tests and given me around a minimum of 80% score since inception, will be added to my list. I used Freefincal’s Risk-Return Analyzer tool to arrive at a final selection of funds.
- Beta-Volatility measure and tell how much the fund changes for a given change in the Index. Lower the beta, lower the volatility. Hence, your fund must have lower beta.
- Standard deviation-It tells us how for a given set of returns, how much do fund returns deviate from the average. Lower the standard deviation, lower the volatility. Hence, your fund must have lower beta.
- Alpha-It is the risk-adjusted measure. By taking risks, how much the fund manager generated the return over the benchmark. Higher the alpha, higher the outperformance of the fund.
- Sharpe Ratio-It is the risk-adjusted measure. Higher the Sharpe ratio, better is the performance.
- Sortino Ratio-It is the risk-adjusted measure. Higher the Sortino ratio, better is the performance.
- Treynor Ratio-It is also be known as reward ratio. Higher the Treynor ratio, better is the performance.
- Information Ratio-This is calculated by average excess return obtained compared to a benchmark and divides it by the standard deviation of excess returns. Higher the information ratio, higher the consistency in beating the benchmark.
- Omega Ratio- It is a risk-return performance measure of an investment asset.
- Downside deviation-This is also be called as BAD RISK.
- Upside potential-This is exactly the opposite of Downside deviation.
- R-squared- It is a measure of how correlated the fund’s NAV movement is with its index.
- SIP Returns-For how many times the fund’s returns are above the index when we invest in SIP.
- Lump Sum Returns-For how many times the fund’s returns are above the index when we invest in a lump sum.
Below are my Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017.
Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017
As I pointed above, I first shortlisted Top 15 Best ELSS Tax Saving Mutual Funds. They are as below.
- Axis Long Term Equity Fund (Consistency Score 100% and Fund Age 6 Yrs)
- Birla Sun Life Tax Plan (Consistency Score 100% and Fund Age 12 Yrs)
- Birla Sun Life Tax Relief 96 (Consistency Score 100% and Fund Age 12 Yrs)
- DSP BlackRock Tax Saver Fund (Consistency Score 100% and Fund Age 8 Yrs)
- Franklin India Taxshield Fund (Consistency Score 100% and Fund Age 12 Yrs)
- ICICI Prudential Long Term Equity Fund (Tax Saving) (Consistency Score 100% and Fund Age 12 Yrs)
- Invesco India Tax Plan (Consistency Score 100% and Fund Age 8 Yrs)
- Tata India Tax Savings Fund (Consistency Score 100% and Fund Age 12 Yrs)
- Reliance Tax Saver Fund (Consistency Score 90% and Fund Age 10 Yrs)
- BNP Paribas Long Term Equity Fund (Consistency Score 89% and Fund Age 9 Yrs)
- IDFC Tax Advantage (ELSS) Fund (Consistency Score 86% and Fund Age 7 Yrs)
- Edelweiss ELSS Fund (Consistency Score 83% and Fund Age 6 Yrs)
- Canara Robeco Equity Tax Saver Fund (Consistency Score 67% and Fund Age 12 Yrs)
- SBI Magnum Taxgain Scheme (Consistency Score 58% and Fund Age 12 Yrs)
- HDFC Taxsaver Fund (Consistency Score 50% and Fund Age 12 Yrs)
Among these top 15 ELSS or Tax Saving Funds, I have to select Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017. They are as below.
1) Birla Sun Life Tax Plan-G
My first choice this time among “Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017” is Birla Sun Life Tax Plan. I excluded Axis Long Term Equity Fund due to it’s underperformance score of 20 for a year. Even though you may feel it as a knee-jerk reaction, but giving the best track record old funds availability, I thought to rely on older than the new fund.
The risk-return score of Birla Sun Life Tax Plan is as below.
Since 10 years the fund is performing nicely. So why not pick this fund as my first choice?
2) Birla Sun Life Tax Relief 96-G
My second choice is again within Birla AMC. The fund is Birla Sun Life Tax Relief 96. Below is the consistency score fo the fund.
3) DSP BlackRock Tax Saver Fund-G
Third among Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017 is DSPBR Tax Saver Fund-G. This is almost 8 years old fund with consistent track record. Below is the track record of risk-return analyzer score of the fund.
4) Franklin India Taxshield-G
Fourth among top 5 is Franklin India Taxshield-G. You notice that even though consistency is 100% but when it comes to the risk-return analyzer, since a year the fund is giving us the score of 40 (better than Axis Long Term Equity Fund). But I will not deter with the one-year drop. I go ahead and recommend you the same. Below is the risk-return analyzer score of the fund.
5) ICICI Prudential Long Term Equity Fund-G
Last among Top 5 is ICICI Pru Long Term Equity Fund-G. Even though fund score is 75 for a year, I still suggest the best fund for investing.
These are my Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017 among ELSS category of funds. Please note that the benchmark set for each fund is different. Also, you must analyze where the fund is investing. Based on that you may take a decision. After all, it is my BEST, but it does not mean that it must be UNIVERSAL BEST.