What does ELSS mean? Which are the best ELSS Funds in India for FY 2018-2019? Why do we call it Tax Saver Mutual Funds? What are the tax exemptions, we get under tax saving Mutual Funds? What are different types of options to choose while investing in tax saving best ELSS funds?
We are again into another tax savings season and all are thinking of the best tax savings option for us? This is the time of the year where you will be receiving umpteen numbers of calls from many agents to sell their tax savings instruments. We know the common names like Life Insurance Premium, PPF, and Employees PF that can help you save tax under Section 80C. But the less popular one is ELSS – Equity Linked Savings Scheme.
While it is good to save tax, most important thing is to check whether the instrument you choose will give you a decent risk adjusted returns. Premium paid for traditional life insurance policies will help you save tax, but the returns from such policies will be hardly 5-6% on a long term. Public Provident Fund will be a much better option if you can wait for a long term.
If you are a bit aggressive, then you have another Tax saving investment option under Section 80C.
What are ELSS Funds – Tax Saving Mutual Funds Meaning?
It is the Equity Linking Savings Scheme of mutual funds (ELSS Funds) which are also known as tax saving mutual funds.
We have heard about the different types of mutual funds in the market. They are mainly classified as Equity Funds, Debt Funds and Balanced Funds. Within equity funds, a category of fund with certain additional conditions like lock-in period, income tax benefits etc. is known as ELSS or Equity Linked Savings Scheme.
How to Invest in ELSS Funds and How it Works?
The ELSS Mutual Funds comes with a 3-year lock-in period – you cannot sell the units within 3 years from the date of investment. If you are opting for an SIP in ELSS Mutual Funds, then each SIP installment will have the mandatory 3-year lock-in period.
You can also invest a lump sum amount in ELSS tax saving funds.
Mutual Funds Tax Benefits 80C
The amount invested up to a maximum of Rs. 1.5 Lakh in a year will qualify for tax deduction under Section 80C along with other instruments like Life Insurance Premium, PPF, etc.
Since, it is equity linked mutual fund, there will not be any tax implication on the long-term capital gain as there is no tax on long-term capital gains for up to Rs. 1 lakh profit within a year, when you are selling the units after the 3-year mandatory lock-in period. Capital gains above Rs. 1 Lakh per year will be taxed at 10%.So, the sale proceeds after 3 years will be totally tax-free in your hands if the capital gains are less than Rs. 1 Lakh . You get tax deduction on investing also.
ELSS Funds – Growth or Dividend Options
- Growth Option – In ELSS Growth Option Fund, income earned by the Fund is not distributed to investors. Any income earned by the Fund increases the NAV of the units. Whenever the investor sells his units, he will realise long-term capital gain. He will not get any dividend in this option.
- Dividend Option – In the ELSS Dividend Option Fund, the Fund distributes income earned by the Fund to the investors as periodic dividends. The date of dividend distribution and the rate of dividend etc. will be decided and declared by the Fund. The dividend received by the investor is tax-free in the hands of investors. But after the payout of dividend, the NAV of the unit reduces by the same amount of dividend. In effect, the investor is not getting anything extra from Mutual Fund dividends.
Advantages & Disadvantages of ELSS Mutual Funds over Traditional Tax Savings Instruments
PPF is the most popular tax savings instrument issued by the Government of India. Public Provident Fund (PPF) has a lock-in period of 15 years. But ELSS has an advantage of lock-in period of 3 years only.
The return in best ELSS funds varies depending upon the market condition. Past experience however shows an average return of 12-15% over a long period of time.
But remember that, ELSS performance can be volatile in the short-term, being an equity investment. Invest in it only, if your investment duration is long-term.
One disadvantage can be tax on capital gain of more than Rs. 1 Lakh in a Year.
Best ELSS Funds to Invest in 2018-2019
Here is the list of best ELSS funds to invest in 2018-2019. The list is of Top 5 Tax Saving Mutual Funds in India.
- Birla Sun Life Tax Relief 96 Fund Direct Fund
- Franklin India Tax Shield Direct Fund
- Reliance Tax Saver Fund Direct Fund
- Axis Long Term Equity Fund Direct Fund
- HDFC Tax Saver Fund Direct Fund
Before getting into details of each fund separately, let us check
How to Choose Top 5 Tax Saving Mutual Funds for 2018-2019
- These tax saving mutual funds have a direct plan which helps you to reduce your fund management charges in the range of .5% to 1%. Though this .5%-1% does not seem too big in the beginning, but as your corpus grow these charges start eating your funds.
- The mentioned best ELSS Funds have consistently performed for last 5 Years. Everyone believes in consistency so do I.
- Returns for both SIP and Lump are good.
- There are other factors like Alpha, Beta, Standard Deviation, Sharpe Ratio where these funds are performing well.
Top 5 Tax Saver Mutual Funds – ELSS Funds Returns
| Returns in % | |||
| Scheme Name | 1 Year | 3 Years | 5 Year |
| Birla Sun Life Tax Relief 96 Direct Fund | 26.2 | 12.2 | 22.7 |
| Franklin India Tax Shield Direct Fund | 12 | 8.6 | 18.4 |
| Reliance Tax Saver Fund Direct Fund | 15 | 6.9 | 22 |
| Axis Long Term Equity Fund Direct Fund | 23.8 | 9.45 | 23.8 |
| HDFC Tax Saver Fund Direct Fund | 14.4 | 8.1 | 17 |
Fund Performance
Birla Sun Life Tax Relief 96 Direct Fund
The fund launched in Jan 2013 has given a returns of 20.6%.
HDFC Tax Saver Fund Direct Fund
The fund is a good performer since its launch in Jan 2013. The fund has given returns of 15.7%.
Franklin India Tax Shield Direct Fund
Franklin India Fund is in existence for the last 15 years and is a good performer. The direct fund has given returns of 17.3%.
Axis Long Term Equity Direct Fund
Though the Fund is having only 5 years’ track record, it is worth investing due to its stellar performance.
Reliance Tax Saver Fund Direct Fund
The fund is a good performer since its launch in Jan 2013. The fund has given returns of 19.3%.
Benefits of ELSS Funds and Point of Caution
Though the mandatory lock-in period in ELSS Mutual Funds is 3 years, just like any other Equity Mutual Fund, you can expect decent returns only if you have an investment horizon of at least 7 years.
There are various benefits of ELSS funds like tax saving, higher returns.
Investing through SIP covering the 12-month period will be better to benefit from the rupee cost averaging. Opting for Growth Option will help you in capital accumulation.
Mutual Funds Performance – Value Research
What is your view on Best ELSS Funds?
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An IIM Kozhikode alumnus, Karan vashisht has more than 7 years of experience in product design for financial services sector. He likes to write on topics related to personal finance. Founder at startup related to IoT and motor insurance, he is an avid follower of tech that impacts daily lives.
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