Check out the list of top 5 ELSS Mutual Funds
Amongst all the tax-saving instruments available in the market, Equity Linked Savings Scheme (ELSS) is one of the popular and preferred one. It is not just one of the best tax-saving options, but also an excellent option for long-term investment.
What are the features of ELSS?
ELSS is a diversified, open-ended equity mutual funds, which comes with a lock-in period of 3 years. You can invest in ELSS through Systematic Investment Plans (SIP) or as a lump sum.
Investments in ELSS have a minimum lock-in period of 3 years. If you are investing through SIP, every SIP in locked for 3 years. After the lock-in period, you can either redeem the units or continue to hold it as long as you want it. However, this has the shortest lock-in period among all the tax-saving instruments.
Investments in ELSS are eligible for tax deduction under Section 80C up to a maximum of Rs.1,50,000. Redemptions from ELSS funds after the lock-in period, are subject to Long Term Capital Gains (LTCG) tax at the rate of 10% of the gains that is above Rs.1 lakh.
Risk and Returns:
ELSS is a diversified, equity scheme and hence, its performance will depend on the stock market performance. Though equity is known to give the best returns in the long-run, there is always an inherent risk that is associated with it.
ELSS offers options to invest in Growth or Dividend schemes only. Dividend Reinvestment option is not available, also there are no entry and exit loads for ELSS.
The Top 5 ELSS funds for 2018-19
The fund selection process should not focus only on the returns generated by a fund but also on the qualitative factors like asset allocation and quantitative factors like expense ratio, beta, Sharpe ratio etc.
We have applied the below criteria to do an in-depth analysis of all the ELSS funds and arrive at the top 5 funds.
- As a first step, we shortlisted those funds which have given the highest returns over a period of 5 years. A fund which has given good returns over a longer period implies that it has weathered many bullish and bearish market cycles and has performed on par or better than the index.
- Regular plan with growth option has been chosen for analysis. It is always best to choose the growth option as in the dividend option, the dividend is given by booking profits from the assets held of the fund.
- Expense Ratio of the funds was also an aspect that was considered to shortlist the fund. Lesser the expense of managing the fund, greater the possibility of high returns. However, less expense ratio doesn’t always translate into higher returns because there are many other factors that influence the returns.
- A critical part of the selection process was the use of financial ratios for quantitative analysis.For analyzing the volatility of returns, Standard Deviation and Beta have been used.Standard Deviation indicates how much a fund’s return can deviate from its own historical mean return. A higher standard deviation of an ELSS means that the return of the fund can vary highly in both positive and negative direction, as compared to it average return over a period.Beta indicates how much a fund’s returns can vary as compared to the benchmark index. The beta of the index is always 1. Higher beta indicates that the ELSS fund’s returns are volatile than the index returns.
Sharpe Ratio and Sortino Ratio help in understanding whether a fund will be able to generate higher returns on taking higher risks.
Downside Capture Ratio helps in understanding how an ELSS fund would protect its gains and control its losses during a period of negative market returns.
Alpha indicates how much excess returns a fund can generate as compared to its benchmark.
- For qualitative analysis, the asset allocation of the fund was considered. An ELSS fund comprising of mostly large-cap stocks was less volatile and gave stable returns over a period. Returns from the funds with mostly midcap and small-cap exposure tend to be highly volatile and can also generate high returns.
Applying the above criteria, we have arrived at the top 5 performing ELSS funds for 2018 as shown in the table.
Though these are the top 5 funds, it is important to choose the right fund suitable for you. The choice has to be made depending on your risk profile and investment philosophy before making the decision. Let us analyze these funds from various points of view.
Over a period of 10 years, Tata India Tax Savings Fund and L&T Tax Advantage Fund are the oldest funds and have given good returns.
They have withstood the market crash in 2008 and have given returns above their benchmark index during the bull runs in 2003, 2007 and 2017 also. You can consider these if you want above average and stable returns.
Axis Long Term Equity Fund is the top-runner in terms of returns in a 5-year period and IDFC Tax Advantage (ELSS) Fund is one of the top performers in ELSS category in the last one year. However, both have not weathered the worst of bear runs like in 2008.
Axis Long Term Equity Fund has the lowest expense ratio among all these funds. L&T Tax Advantage Fund and IDFC Tax Advantage Fund also have expense ratios on the lower side.
Risk of a fund is measured using financial ratios like SD, beta, Sharpe Ratio etc.
Among the 5 funds, SD of Tata India Tax Savings Fund is the highest which indicates that the fund is more volatile and there is always a possibility of getting higher returns than expected and an equal possibility of losing the invested amount. Axis Long Term Equity Fund has the SD which means that it is less volatile and there is less possibility of making heavy losses.
Beta indicates how volatile a fund is as against the market. Higher the beta, higher the risk of the fund. So, this is the best value to check if a fund suits your risk profile.
Axis Long Term Equity Fund has a beta of 0.76 which is the lowest in the category. It means that it carries lower risk and if the benchmark index goes down by 1, then the fund returns will go down only by 0.76 times.
IDFC Tax Advantage Fund and Tata India Tax Savings Fund has a beta of 0.93 and 0.96 respectively. The fund has almost the same risk as that of the benchmark index.
Sharpe Ratio indicates how much returns can a fund generate for every additional unit of risk taken. L&T Tax Advantage Fund has a higher Sharpe Ratio among all these funds. For every single unit of risk taken by you, you will get 0.81 times the excess returns.
Of all the 5 funds, L&T Tax Advantage Fund has a high Sortino Ratio meaning it can give you 1.13 times risk-adjusted returns as compared to others. Axis Long Term Equity Fund has a lower Sortino Ratio of 0.85 meaning the fund takes a lesser risk and the return for the risk taken, is also less.
Alpha indicates the excess returns the fund has generated as compared to the risk-adjusted expected return. IDFC Tax Advantage Fund and L&T Tax Advantage Fund have the highest alpha as compared to other funds in the list. Axis Long Term Equity Fund has a lower value of alpha.
All the schemes listed are diversified equity schemes with exposure to large-cap, mid-cap,and small-cap securities, except Axis Long Term Equity Fund which has exposure only to large cap and small cap securities.
What has changed from our previous list of top ELSS funds?
We had published the top ELSS funds in 2016 also. Of the top 5 in 2016-17, only Axis Long Term Equity Fund has remained in the top 5. The other 4 funds which did not make it to the list this year and the reason for the same is given below:
- Reliance Tax Saver Fund– This fund has no doubt given the best returns in the last 5-year and 10-year period. However, the returns from the last year is not the best in the category. Also, the standard deviation is very high at 17.2. The Sharpe ratio is only 0.51 indicating that for every unit of risk taken, 0.51 times returns are generated. Also, for a given beta of 1.12 which is very high, the alpha generated is at a low of 1.22. Hence, this fund has not made to the top 5.
- Franklin India Taxshield Fund–The expense ratio of this fund is 2.41 which is a higher range for the category. Also, the returns from the past 3 years has not beat the benchmark for this category. The Sharpe Ratio is low indicating low returns for the risk taken. Also, for a beta of 0.82, alpha of 2.3 is less. So, it has not made to the top funds of this year.
- ICICI Prudential Long-Term Equity Fund –The return from this fund is below the category returns from a 3-year period. The Sharpe Ratio is also low at 0.43 indicating that the returns are less for the amount of risk taken. The alpha is also low at 1.7 which implies that the fund has not been able to generate excess returns.
- DSP BlackRock Tax Saver Fund–This fund has a high expense ratio of 2.5. The standard deviation is also one of the highest in the category, indicating volatility. For a beta of 0.98, it is generating an alpha of 5.33. Though this cannot be seen as a deplorable performance, other funds which have made it to the top such as L&T Tax Advantage Fund and Tata India Tax Savings Fund have generated better alpha with much lesser beta.
If you want better returns at lesser risk, you can choose to invest in Axis Long Term Equity Fund.IDFC Tax Advantage Fund and Tata India Tax Savings Fund have higher beta and SD and hence, suitable for if are ready to take higher risk for higher returns. Of the five, L&T Tax Advantage Fund and Aditya Birla Sun Life Tax Relief 96have moderate risk and have given above-average returns.
Mutual Fund investments are subject to market risks. To determine what is best suited for you, consult your financial adviser.