A tax-saving fund is called an ELSS (Equity Linked Savings Scheme). There are three-year lock-up periods on these Flexi cap mutual funds. Section 80c of the Income Tax Act, 1961 provides tax benefits for investments. In the case of individuals and HUFs, this benefit limit is Rs.1,50,000 a year. In these funds, the maximum investment is in equity and the remainder can either be in cash or in debt. There are two investment options available: lump sum and systematic investment plan(SIP).
Key points :
- ELSS are Multi- Cap funds. They can invest in any stocks across Large, Mid, and Small Cap.
- Try not to invest in the lumpsum amount at the last moment or end of the financial year. Because they are heavily relying on the equity market just like other equity mutual funds. So it is better to invest at the beginning of the financial year.
- Invest in ELSS funds only for long-term financial goals.
Examples:
SBI conservative hybrid Fund is conservative and most of its allocation is in large caps only, HDFC balanced advantage fund – direct plan – growth has a balanced approach and has some mid and small-cap allocation also while ICICI prudential equity & debt fund is an aggressive fund with a higher allocation to mid and small caps.
Advantages of investing :
- The amount that could be saved on taxes is up to Rs.46,800, subject to a 30% tax slab.
- Can invest as low as Rs.500 or a maximum of Rs.1,00,000.
- Get higher potential returns as compared to other 80c investments.
- It has the shortest lock-in period as compared to FDs, PPFs, etc.
Parameters to check before investing :
Historical returns:-
There are 3 types of returns – calendar return, rolling return, and trailing return.
- Calendar returns: these are absolute returns. It gives fund performance in market rises and falls.
- Rolling returns: it is a more reliable parameter as it tells how a fund’s return has improved continuously.
- Trailing return: it tells the value of investments over a given time.
AUM:-
Assets Under Management, gives an idea of the beliefs of investors in a particular mutual fund scheme. Fund companies hire the best mutual fund managers for their work with high AUM. Therefore, mutual schemes with low AUM should be rejected because of their higher volatility, high expense ratio and risk profile could also be higher.
Portfolio Turnover Ratio:-
It means how many times the manager is churning the portfolio. The higher the portfolio turnover, the expense ratio might be higher.
Expense ratio:-
You should not choose schemes with very high expense ratios. You should select a mutual fund scheme with a moderate or low expense ratio. Mostly established ELSS funds have a lower expense ratio.
Sharpe ratio:-
Measures returns concerning risk taken. it means how much return the mutual fund can generate over risk-free returns. A good mutual fund scheme will have a high Sharpe ratio.
Portfolio concentration:
Concentration in a single stock or top 10 stocks should not be very high.
Options for investing:–
Dividend fund:-
There is no compounding gain in these types of funds. In these types of funds, you will receive returns in between. However, the dividend amount is not fixed.
Growth fund:-
There is compounding gain in these types of funds. In these types of funds, you will not receive any returns in between. You will not receive any interest, dividends, bonuses, etc. you can receive the returns after the sale of units.
Dividend re-investment:-
In these types of funds lock-in starts from re-investment. It is a mixture of both growth and dividend funds. The fund declares a dividend. But the dividend is not given in cash, it is re-invested into the same fund scheme for additional units.
Safe funds:-
Safe funds are large-cap funds with lower risk. For example top 30 companies of Sensex, or the top 50 companies of nifty.
Aggressive funds:
Aggressive funds are small-cap funds with higher risk.
Balanced funds:-
Balanced funds are mid-cap funds with moderate risk.
At all times select the Growth plan of ELSS funds over the dividend re-investment option as it will make taxation complicated.
Taxation:- The ELSS mutual funds are taxable as – a flat 10% on gains & dividends. Gains above 1 lakh are taxed.
Risk profile:- all ELSS mutual funds will have a higher risk among all options of sec 80c. because the investment is in stocks listed on the stock exchange.
Also read,
Some of the ELSS based on the above parameters:–
- Quant Tax Plan Direct-Growth
- IDFC Tax Advantage Direct Plan-Growth
- Canara Robeco Equity Tax Saver Direct – Growth
- Mirae Assets Tax Saver Fund Direct-Growth
- DSP Tax Saver Direct Plan-Growth
- Kotak Tax Saver Fund Direct-Growth
| Mutual funds | Fund size | Expense ratio | 3 years return | Min sip investment |
| Quant tax plan direct | Rs.1584 Cr | 0.57% | 42.78% | Rs.500 |
| IDFC tax advantage direct plan | Rs.3692 Cr | 0.75% | 26.09% | Rs.1000 |
| Canara Robeco equity tax saver | Rs.3957 Cr | 0.60% | 25.08% | Rs.500 |
| Mirae assets tax saver fund | Rs.12615 Cr | 0.56% | 23.5% | Rs.500 |
| DSP tax saver direct plan | Rs.9966 Cr | 0.82% | 21.52% | Rs.500 |
| Kotak tax saver fund direct plan | Rs.2794 Cr | 0.75% | 21.77% | Rs.500 |
Difference between ELSS and other options of sec 80c:-
| Basis | Lock in | Taxation | Risk |
| ELSS | Only 3 years | Flat 10% on gains & dividends | Highest risk among all options |
| PPF | 15 years | Tax-free | Very safe |
| NSC | 5 years | Taxable as per slab | Safe |
| Bank FDs | 5 years | Taxable as per slab | Safe |
Where to look for information on mutual funds?
There are many websites available where information about mutual fund markets, schemes, and news is given. Following are a few good ones:
- ·Sebi website: it has all the information about the mutual fund regulations and the latest NFOs offer details.
- Mutual fund house’s website: most fund houses have the latest and extensive information about their schemes like daily NAVs, latest news, factsheets, investment forms, and online transaction options.
- AMFI website: they also give all information about mutual fund schemes and related data like NAV, AUM, NFO info, distributor info, all historical data, etc.
- Other websites: there are many other websites, which give useful analysis, comparison, and ratings of the mutual fund industries. Some of them are:
- Moneycontrol.com
- Crisil
- Economics times
- Clear tax
- Stockedge
Conclusion:
If you are young or a risk-taker, ELSS should be your preference. Due to its higher returns & lower tax systems.