Which are Top 5 Best ELSS Tax Saving Mutual Funds 2018 to invest in India? How can we shortlist among the so many ELSS or Tax Saving Mutual Funds? Let me ease your work.
Recently I wrote a post Top 10 Best SIP Mutual Funds to invest in India in 2018. In that post, I have not covered ELSS or Tax Saving Mutual Funds. Because yearly I used to write a separate for ELSS Funds. Hence, following the trend, I am writing this post.
Before proceeding further, let us first recap the recommendations of 2017. Last year I wrote a post on this (Top 5 Best ELSS Tax Saving Mutual Funds to invest in 2017). Hence, it is mandatory to review the funds.
You notice from above table that DSPBR Tax Saver Fund (G) has not beaten the benchmark since a year and ICICI Pru Long Term Equity Fund (G) since two years. However, when you look at their 5 years and 10 years returns, then easily beaten the benchmark.
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 a 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 tax benefit 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.
Taxation of ELSS Tax Saving Mutual Funds for 2018
ELSS or Tax Saving Mutual Funds are considered as equity mutual funds for tax treatment. Hence, they are taxed accordingly. I tried to explain the same in below image.
The rate of taxation is as below for the current FY.
Hope taxation part is clear to all of you. If you still have doubt, then refer my latest post “Mutual Fund Taxation FY 2017-18 and Capital Gain Tax Rates“.
How I selected Top 5 Best ELSS Tax Saving Mutual Funds 2018-2019?
I will first screen the top 10 funds based on their returns to benchmark since inception. The funds who consistently beaten the benchmark are listed in that 10. 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.
Again, I am not saying that these 5 funds alone be considered as “Top 5 Best ELSS Tax Saving Mutual Funds 2018”. 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.
- 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 2018
Top 5 Best ELSS Tax Saving Mutual Funds 2018-2019
Below are the 10 ELSS Tax Saving Mutual Funds under my radar. Based on these I shortlisted Top 5 Best ELSS Tax Saving Mutual Funds 2018-2019.
- Axis Long Term Equity Fund (Age 7 Yrs)
- Birla Sun Life Tax Plan (Age 18 Yrs)
- Birla Sun Life Tax Relief 96 (Age 21 Yrs)
- DSPBR Tax Saver Fund (Age 10 Yrs)
- Franklin India Taxshield (Age 18 Yrs)
- HDFC Long Term Advantage Fund (Age 16 Yrs)
- ICICI Prudential Long Term Equity Fund (Age 18 Yrs)
- IDFC Tax Advantage (Age 9 Yrs)
- L&T Tax Advantage Fund (Age 11 Yrs)
- Tata India Tax Saving Fund (Age 21 Yrs)
Among these 1o funds, I have selected the Top 5 and listing them as below.
You noticed that I did only one change. I removed ICICI Prudential Long Term Equity Fund due to it’s consistently 2 years underperformance to it’s benchmark and added Tata India Tax Saving Fund.
However, those who are investing in ICICI Prudential Long Term Equity Fund may continue as usual for few more days by keeping an eye on the fund performance. For fresh investors, I am suggesting Tata India Tax Saving Fund over ICICI Prudential Long Term Equity Fund.
Let me know if you have any doubts.
Refer my other posts related to Mutual Funds of 2018