Best ELSS to Invest in 2015
Who doesn’t want to save income tax? You do! We do! Thus, keeping in mind our inherent tendency to save some hard-earned money from the prying eyes of the Income Tax Department of India, we suggest a list of ELSS that you can invest in 2015. Well, there aren’t just any randomly selected ELSS schemes. The schemes that have been put together here are best ELSS in their class and have a history of consistently good performance while doing what we desperately want them to do – save taxes!
Now that’s a smart question and you should be asking this question because it is your hard-earned money that will be subjected to market risks. Here are the reasons which will answer your question:
- All tax-saving investment plans are listed in Income Tax Act’s Section 80C. However, among all listed investment instrument, only ELSS Mutual Funds is the type of instrument that allows people to invest in plans that allows capital gains through Equity Market. Equity market? Well, that’s where you take risk and earn but luckily, Mutual Funds have highly experience asset managers who know how to manage risk.
- Among all investment vehicles made available by 80C, ELSS Mutual Funds have THE MINIMUM lock-in period.ELSS Mutual Fund is the only type of invest instrument available that has the least lock-in period. In this type of investment, the money remains locked in for just 3 year. On the other hand, the other instruments like PPF, Bank Fixed Deposit and National Saving Certificate have a lock-in period of 5 years. This means that once invested, money from these investment instruments cannot be taken out before 5 years is completed. With ELSS, you can withdraw your money just after 3 years.
- ELSS enjoys EEE rule of taxation. EEE stands for Exemption-Exemption-Exemption. This means that you don’t have to pay taxes when you are contributing to the ELSS scheme, you don’t have to pay taxes when your ELSS account is earning money through market investments (known as wealth accumulation) and you don’t need to pay taxes when you withdraw the principal investment and the accumulated wealth.
- Under ELSS, investors also enjoy tax-free dividend earnings.
- You can invest as much as you want in ELSS scheme. There is no investment cap. However, EEE rule has a cap. This means that the moment your accumulated wealth exceeds ₹ 1 lakh, 80c will no longer protect you for the extra money earned above the 1 lakh limit. You need to pay taxes for that extra earning.
- ELSS will allow you to get your hands dirty with Systematic Investment Plans (SIP), right inside the ELSS instrument. With just additional ₹ 500 a month, you can start your SIP investments. There is no need to continue investing for a long period. You are free to stop SIP investment anytime you wish to.
Sounds good? Okay, now that we have your attention, here is our list of best ELSS to invest in 2015:
Let us start with a chart:
|Fund& Inception Date||3-year Performance||5-Year Performance||8-Year Performance||Risk|
|Reliance Tax Saver23 August, 2005||38.2%||48.3%||20.6%||30.7%||21%||21.6%||High|
|Axis Long Term Equity Fund21 December, 2009||37.3%||42.5%||24.4%||35.6%||—||—||Low|
|Birla Sunlife Tax Plan1 October, 2006||31.5%||38.3%||15%||24.5%||18.1%||17.5%||Average|
|BNP Paribas Long Term Equity Fund20 December, 2005||30.4%||35.8%||16.9%||24.4%||11.8%||16.2%||Below Average|
|ICICI Prudential Tax Plan – Regular Plan9 August, 1999||29.6%||34.1%||16.4%||22.5%||20.6%||18.2%||Average|
|Religare Invesco Tax Plan20 November, 2006||29.4%||36.5%||17%||24%||16.3%||20.3%||Below Average|
|Franklin India Tax Shield Fund10 April, 1999||28.8%||33.9%||17.5%||23%||20.9%||18.6%||Low|
|HDFC Tax Saver18 December, 1995||26.3%||34.3%||14.9%||21.7%||21.2%||17.9%||Above Average|
|Tata Tax Saving Fund31 March, 1996||26.3%||26.6%||14.3%||17.9%||16.9%||13.9%||Low|
|Canara Robeco Equity Tax Saver Fund – Regular31 March, 1993||25.6%||30.5%||15.6%||20.8%||21.7%||18.5%||Below Average|
LI-R – Lump Sum Investment Returns
SIP-R – SIP Returns
In case you are aiming for:
- Withdrawal after 3-year lock-in period &
- High returns for Lump Sum Investment
Then according to the chart above, the ELSS Mutual Funds that you should aim for are arranged in order of highest Lump Sum Investment returns to lowest. Else, depending on whether you love risk or you hate risk and also whether you prefer SIP (Systematic Investment Plan) or Lump Sum Investment, you are free to select a fund based on the returns it has provided over the past 3 years, past half-a-decade or past decade. There is a mix and match. Some perform better for LI-R and some perform better for SIP. However, all of them perform best in the first 3-year lock-in period.
Based on the above tabular chart and the graphical representation, you will notice that Reliance Tax Saver and Axis Long Term Equity Fund with inception dates of 23 August, 2005 and 21 December 2009 are the best performing ELSS Mutual Funds in both 3-year and 5-year period.
Factors considered for comparison:
The comparative data provided above is based on certain factors which are:
- Duration for which the funds have been present in market. None of the funds selected above are less than 5 years old.
- Profits and losses against predefined market benchmark. All funds above have either performed way above the market benchmark or they have lost less compared to other players in market that dipped way below the market benchmark during economic downswings.
- Risk grade of a fund. This simply means that what kind of investment instruments are selected. High risk grade means more investment in equity instruments. Low risk means more investment in debt instruments. Also, risk is measured based on portfolio diversification of the funds. The more diverse a portfolio of a fund, the more spread out the risk is. When the risk is spread out, the chances of loss is reduced significantly.
There are several other factors that have been included such as RISK-RETURN tradeoff, expense ratio etc. but they are way too technical to be explored in this simple article. They also require a significant knowledge of statistics and hence, discussion of those factors have been deliberately left out.
Wise to get hands dirty with SIP in ELSS?
This is your personal preference. SIP investments are separate from the lump sum investment for ELSS. By introducing SIP, you will open a path for increased wealth accumulation. SIP investments require very little investment and takes advantage of market volatility and compounded growth. This means that even a small amount of investment can exponentially increase your profits. But again, SIPs are subject to highly volatile market conditions and hence, risk of losing SIP investments are still there. Luckily, Mutual funds SIPs are invested in both low and high market conditions with small investments every month. These investments are spread out on high Net Asset Value (NAV) units during high market conditions and low NAV units during low market conditions. This unique spread in either condition of the market averages out the cost of investment and thereby offers a steady growth at compounding rates. We will always suggest to make small SIP investments every month.
Dividend Reinvestment or Growth?
Conventional wisdom and rational behavior states that you should opt for growth. What really happens in dividend reinvestment option is actually a grim scenario. Every time you earn dividend, you don’t get to see the money. It is taken and reinvested. Each investment gets locked for a subsequent period of 3 years because ELSS has a lock-in period of 3 years. This will keep happening over and again until you decide to close the investment prematurely or the investment plan runs its course and matures. What really happens with growth is that you can take the dividend money and spend some of it in form of SIP investment for quick growth. There is no need to wait for 3 years.
Do not invest in similar funds from same category. The reason is simple. Under different market conditions, different categories perform better. In case of terrible conditions, a category may start losing out while another one stars benefiting. If you have invested in more than one fund from the same category, you will lose money from all funds. So, if you are looking for diversification, go for multi-category diversification instead of multi-fund diversification in same category.