Tax-saving mutual funds are rising in popularity due to the shortest lock-in and high wealth creation potential compared to Section 80C alternatives
Equity-linked savings schemes (ELSS), which are also called tax-saving mutual funds, offer an excellent combination of shorter lock-ins, market-linked returns, and greater flexibility. This makes the ELSS category one of the top choices for investors. Since every investment in ELSS or a tax saving fund faces a mandatory lock-in of three years, many investors may not review it before three years. That approach is not right. Investors should review their fund performance every 12 months and try to understand what is happening with their money. The reasons behind out-performance or under-performance must be understood clearly.
Continuing our review of key mutual fund schemes (we started with multicap funds here), today we will take a closer look at ELSS products. We have taken a look at 35 tax-saving mutual funds that manage investors’ money worth Rs 97,000 crore.
In this article about best-performing ELSS or tax-saving schemes of 2019, we will look at many facets of the returns of open-ended funds i.e. where you can enter and exit freely. We have ignored closed-ended equity funds.
The returns mentioned in this article are for regular plans i.e. the plan you buy from an advisor/broker/distributor. The study period of performance is as on December 23, 2019. A few daily trading sessions are still left, but they are unlikely to make much of a difference to the overall picture. Read on to know more.
The top five ELSS performers in 1-year period are DSP Tax Saver (15.88%), JM Tax Gain (15.8%), BNP Paribas Long Term Equity (15.8%), Axis Long Term Equity (15.63%) and BOI AXA Tax Advantage (15.24%).
In terms of benchmark outperformance i.e. the excess return delivered by your ELSS over its stated benchmark index, the top five are still there. DSP Tax Saver (delivered 5.62% points more than its benchmark), JM Tax Gain (5.54% points extra), BOI AXA Tax Advantage (4.98% points extra), BNP Paribas Long Term Equity (4.21% points extra) and Axis Long Term Equity (3.73% points extra) were top funds even in terms of generating alpha.
For those wondering what are the benchmarks of ELSS funds? There are seven indices: Nifty 200 Total Return Index, Nifty 50 Total Return Index, Nifty 500 Total Return Index, S&P BSE 100 Total Return Index, S&P BSE 200 Total Return Index, S&P BSE 500 Total Return Index and S&P BSE Sensex Total Return Index.
Where there are winners, there are losers too. The bottom five in the ELSS category in 1-year period are Quantum Tax Saving (-1.05%), Nippon India Tax Saver (1.31%), IDFC Tax Advantage (1.89%), Principal Tax Savings (3.36%) and Quant Tax Plan (3.67%). The same funds are also in the list of worst fund performance vis-a-vis stated benchmark. The under-performance range was 7-19% compared to their benchmark.
The 1-year category average for ELSS was 9.08%. If beating the category average is the yardstick, then 17 funds managed to do it. That also means an equal number of funds couldn’t outshine the category average.
We will also take a quick look at the largest of ELSS. The biggest funds continue to draw a lot of investor attention, even though fund size has no effect on future performance. In the last 1-year period, many of the large tax-saving funds could not deliver. We have already highlighted Nippon India Tax Saver. Others in that club are Aditya Birla Sun Life Tax Relief 96 (5.91%), HDFC Taxsaver (4.62%), SBI Magnum Taxgain (5.26%), ICICI Prudential Long Term Equity (8.82%), and Franklin India Taxshield (5.55%).
From a SIP perspective, the 1-year SIP returns ranged between -1.18% (Quantum Tax Saving) to 21.47% (Axis Long Term Equity).
Use RupeeIQ SIP calculator to know how much money your can make from tax-saving funds. Click here.
It is well-known that a good year, or a bad year for that matter, can affect longer term returns. Given that 2019 is what is, we wanted to see whether there is any effect on how 3-year returns look. ELSS investors are mandatorily locked in for three years, so a three year picture can give a good idea.
Our analysis shows that the top five ELSS performers in 3-year period contain a few of the 1-year ones. Here is the list of top five tax-saving mutual funds from a 3 year perspective: Mirae Asset Tax Saver Fund (18.91% CAGR), Axis Long Term Equity (18.5%), JM Tax Gain (17.03%), Tata India Tax Savings (15.83%) and LIC MF Tax Plan (15.73%). Notice how Axis Long Term Equity and JM Tax Gain have come up in the 3-year rankings, thanks to their robust 1-year show.
In terms of benchmark outperformance, four out of the top five are still in the list viz. Mirae Asset Tax Saver (delivered 3.49% points more than its benchmark), Axis Long Term Equity (2.89% points more), JM Tax Gain (2.28% points more), and LIC MF Tax Plan (1.06% points more). A new scheme breaks into the 3-year five top alpha generators in the form of BOI AXA Tax Advantage.
One of the biggest questions on the minds of ELSS investors is whether they can make losses in 3-year period? At least, in the 3-year period we studied December 22 of 2016 to December 22 of 2019, we did not find any scheme that lost money. In terms of poor performers, Nippon India Tax Saver (5.59%), Mahindra Mutual Fund Kar Bachat Yojana (6.30%), Baroda ELSS 96 (8.45%), HDFC Taxsaver (8.98%) and SBI Magnum Taxgain (9.18%) are at the bottom of the charts. They underperformed their respective benchmarks by 5.5-10.5% CAGR, which is quite a lot.
We will also take a look at the biggest ELSS funds. Like in the 1-year period, many of the large tax-saving funds could not deliver in the 3-year period. We have already highlighted Nippon India Tax Saver. Others in that club are Aditya Birla Sun Life Tax Relief 96 (13.71% compared to benchmark return of 15.6%), HDFC Taxsaver (8.98% versus benchmark return of 14.67%), SBI Magnum Taxgain (9.18% versus benchmark return of 14.75%), ICICI Prudential Long Term Equity (11.62% versus benchmark return of 14.67%); DSP Tax Saver and Franklin India Taxshield are also there.
The 3-year category average for ELSS was 12.73%. If beating the category average is the yardstick, then 16 funds managed to do it while 17 funds couldn’t outshine the category average.
From a SIP perspective, the 3-year SIP returns ranged between -1.63% CAGR (Nippon India Tax Saver) to 13.25% CAGR (Axis Long Term Equity).
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Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument including mutual funds mentioned in this article.