Tax season is here. Or more aptly, the season to make those last minute investments for tax deduction benefits. With mutual funds capturing the popular imagination, Equity Linked Savings Scheme or ELSS has definitely been the top choice for tax savers.

As in all categories of mutual funds, the ELSS group also has a bucket load of options. Here are my top picks:

  1. Aditya Birla Sun Life Tax Relief 96
  2. Axis Long Term Equity Fund
  3. DSP Blackrock Tax Saver Fund
  4. Franklin India Taxshield Fund
  5. Reliance Tax Saver Fund

We give you two key parameters for evaluating these schemes – returns and risk.

Returns

Fund 1 Year (%) 3 year (%) 5 year (%)
Axis Long Term Equity 39.22 13.82 24.68
Aditya BSL Tax Relief 96 41.6 16.81 23
Franklin India Taxshield 27.85 12.32 19.17
DSP Blackrock Tax Saver 34.97 16.76 21.39
Reliance Taxsaver 42.38 14.19 23.93
Category Average 36.22 13.64 18.81

(Source: MorningStar, as on 16th Jan 2018 All funds are Direct Plans with Growth Option.)

  • While it is not appropriate to judge equity oriented funds on the basis of the last 1 year, the 3-year and 5-year returns should get your attention. This is because all ELSS funds have a 3-year lock-in. Also considering the volatility associated with equity-oriented funds, the minimum investment horizons for them should be at least five years. The returns within this group of schemes range from 19.17% to 21.68% over a five year time period – all beating the category average of 18.81%.

Risk

Fund Sharpe Ratio Standard Deviation Beta
Axis Long Term Equity 0.88 12.12 0.82
Aditya BSL Tax Relief 96 1.04 13.56 0.93
Franklin India Taxshield 0.77 12.17 0.87
DSP Blackrock Tax Saver 0.73 14.52 1.03
Reliance Taxsaver 0.68 16.81 1.18
Category Average 0.73 14.27 1

(Source: MorningStar, as on 16th Jan 2018 All funds are Direct Plans with Growth Option.)

  • Sharpe Ratio is the indicator for risk-adjusted returns, Aditya BSL Tax Relief 96 fund scores the highest in that regard. However, it must be noted that a higher Sharpe ratio does not necessarily mean a less volatile fund. It simply tells you how big the relative ‘kicker’ of return is, for a given level of risk. Three out of the five selected schemes beat the category average on this parameter.
  • Beta indicates how volatile the fund will be in comparison to the equity market. For example, Axis Long Term Equity fund’s beta is 0.82. This means the fund’s volatility would be 18% less than the overall equity market. In other words, any fluctuations in the market would have a less than linear impact on the fund. This is true once again of three of the five schemes selected.
  • Standard Deviation shows how much the fund performance can deviate from its historical average.  For example, DSP BlackRock Tax Saver’s standard deviation is 14.52% and its 5-year return is 21.39% Therefore this would mean the fund performance, going forward, could range from 6.87% – 35.91%. That is a wide range indeed! A fund with higher standard deviation requires you have to have a larger risk appetite. Once again, the top three schemes on our list have a lower standard deviation than the category average.

Overall, while ELSS funds are a great instrument for the combination of tax saving plus capital appreciation, two important aspects should always be considered before investing into them- (a) They all have a 3-year lock-in; and (b) They are, in the end, equity-oriented funds. To take maximum benefit from them it is advisable to not redeem the investments after 3 years but to give them a much larger horizon before considering redemption.

This way you can truly combine tax planning with long-term wealth creation.

Author
Debendra Das

The author is a private wealth manager and financial advisor. The views are his own. Feedback to this article may be sent to contact@rupeeiq.com.