What are the Best Performing Tax Saving Mutual Funds?

What are the Best Performing Tax Saving Mutual Funds?

It is possible that tax planning is an ongoing process during the entire financial year. At a different point in time, you may be at a certain stage of the tax planning procedure. You may be researching different investment options or looking for the best tax saving mutual funds.

Investing in Equity Linked Savings Schemes (ELSS) is the ideal way of save tax. Also known as the first ever mutual fund, ELSS is the gateway for most investors like you in mutual fund investments because people start investing in mutual funds through these schemes. Your investments in ELSS are eligible for tax deductions under section 80C of the Income Tax (IT) Act, 1961. The maximum allowable deduction is INR 1.5 lakh per annum.

What is an ELSS fund?

ELSS funds are diversified equity-linked investments that offer tax benefits. The majority of the corpus is invested in equities and related instruments. Furthermore, these schemes have a minimum lock-in period of three years. This means to be eligible for the tax deductions, you must keep your capital invested in the ELSS plan for at least three years. Although the lock-in period is only three years, it is recommended you invest in these with an investment horizon of five to seven years to maximize your returns.

Benefits of ELSS funds

In addition to ELSS funds, you may invest in several other financial instruments to save taxes. Some of these include Public Provident fund (PPF), Fixed Deposits (FDs), life insurance policies, National Savings Certificate (NSC), and others. Nonetheless, ELSS has certain advantages over all these other tax-saving investment options.

  1. Lower lock-in period

The lock-in periods for PPF, FDs, and NSCs are 15, five, and seven years respectively. In comparison, ELSS funds have a lock-in period of only three years.

  1. Higher returns

Because a majority of the ELSS corpus is invested in equities, the potential returns are higher when compared to other products. Often PPF, NSC, and FDs returns are lower and insufficient to beat inflation.

  1. Power of compounding

Another reason that makes ELSS best-performing tax saver mutual fund is the compounding effect. If you reinvest your earnings on the ELSS investment, you will be able to earn significant capital appreciation. The power of compounding plays an effective role in building wealth.

Parameters to analyze ELSS funds performances

There are several ELSS plans offered by different mutual fund houses. Here are five parameters that may be used to identify the best ELSS funds.

  1. Mean rolling returns: Mean rolling returns is an essential parameter while identifying which is the best performing ELSS fund wherein the rolled daily for the previous three years is measured.
  2. Consistency: When it comes to the selection of the most promising ELSS fund, the consistency of the fund’s performance during the previous three years is an important aspect, which is further divided into smaller periods with progressive weightage.
  3. Downside risk: Downside risk is a key parameter, which measures the possible loss that may occur in case market conditions change. It calculates the maximum decline the investment may suffer during unfavorable market conditions.
  4. Outperformance: Jensen’s Alpha for the three previous years determines the parameter of outperformance.

In Jensen’s Alpha, the risk-adjusted return generated by the mutual fund plan in relation to the expected market returns as calculated by the Capital Asset Pricing Model (CAPM) is shown. A higher alpha implies that the fund’s performance is better than the overall market performance.

 The average returns earned by the mutual fund plan= Risk-Free Rate + Beta of the   Mutual Fund plan x (Average return of the index – Risk-Free Rate).

  1. Asset size: The threshold limit for diversified equity funds is INR 100crore and it is INR 50crore for balanced funds.

Best performing ELSS funds

Having understood the parameters to determine the best performing tax-saver mutual funds, here are some ELSS plans.

  1. L&T Tax Advantage Fund: This scheme has delivered over 20% returns during the one-year period. Over a period of five years, this fund earned 18% returns.
  2. Aditya Birla Sun Life Tax Relief 96: The one-year return was approximately 17% and returns earned over a five-year period were almost 21%.
  3. DSP BlackRock Tax Saver Fund: This fund earned returns worth 14% during one-year and 20% during a five-year period.
  4. Axis Long Term Equity Fund: This ELSS plan earned 17% returns in one year and 23% returns in five years.
  5. Franklin India Taxshield: This fund delivered over 14% returns during a one-year period and 19% returns during a five-year period.

ELSS investment options

  1. Growth plan

If you choose this option, you will not earn any dividend income. You only receive the returns when you exit the fund. It depends on the Net Asset Value (NAV) and is beneficial for capital appreciation.

  1. Dividend plan

Under this option, you receive periodic income through dividends. This income is tax-free, which is beneficial.

  1. Dividend reinvestment plan

When you opt for dividend reinvestment, your income is reinvested in the prevalent NAV. This allows you to accumulate more mutual fund units and earn higher returns at the end of the lock-in period.

ELSS is not only beneficial for tax savings. These investments are also useful to build wealth through capital appreciation in the long-term.

Start investing in the best ELSS funds today and see your money grow.

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