First post of this year on TFL was “Best Mutual Funds to Invest in 2013” where I listed non tax saving equity & debt Mutual Funds. There were couple of questions related to Tax Saving Mutual Fund or ELSS. So I asked Anil Kumar Kapila (He is an avid follower of TFL; and always try to help other reader by solving their personal finance queries.) to share his views on the same – I have Just added performance charts & tables. Check performance of Best Tax Saving Mutual Funds in last one year.
Tax Saving Mutual Funds
End of the financial year is round the corner. It is the time when the salaried invest to save tax. For those investors who have not done their tax planning hardly any time is left. Eleventh hour tax planners must be now looking for tax saving instruments to park their funds to claim income tax deductions. Tax saving mutual fund is one such instrument.
Tax Saving Mutual Funds are popularly known as Equity Linked Saving Schemes (ELSS). They serve the purpose of combining tax benefits with wealth creation using equities. They are basically meant for tax saving but over the last few years investors in these funds have tremendously grown their wealth. Some ELSS funds have been top performers and consistently outperformed the sensex.
Tax Saving Mutual Fund Vs Diversified Equity Fund
ELSS funds follow the same investment strategy as diversified equity funds. They invest in a portfolio of quality stocks chosen without any market capitalization or sector bias. Investment in ELSS is locked-in for a period of three years from the date of investment. Three- year lock-in period works in favor of these funds. Fund managers can take longer calls and deploy funds without the fear of premature redemption. Because of the stability of the corpus a higher proportion of assets can be deployed for mid and small caps to get superior returns.
Who should invest in Tax Saving Mutual Fund ?
Investors should go for these funds only if their main aim is to save tax. ELSS funds do not allow you to book profits when markets are rising due to the lock-in period. The proposed Direct Taxes Code( DTC) is expected to do away with the tax benefits enjoyed by ELSS.
Since ELSS schemes invest in equity, over longer investment horizons, they deliver the highest long term returns among other tax saving investments. These are suitable for investors with a long investment horizon of more than five years. As these are equity linked schemes, investors should have a higher risk appetite than pure debt investors.
Best Tax Saving Mutual Fund
An optimal way to invest in tax saving mutual funds is by way of monthly SIPs. A large number of tax saver mutual funds are available in the market. Not all are equally good. One must be selective in choosing the right fund. Not more than two funds should be chosen.
Best Tax Saving Mutual Fund
|Axis Long Term Equity||29.48||14.26|
|Canara Robeco Equity Tax Saver||28.40||10.13||6.32||25.07|
|Franklin India Taxshield||26.98||10.38||4.71||25.81|
|HDFC LT Advantage||27.76||8.45||2.99||26.81|
|ICICI Prudential Tax Plan||31.92||9.35||4.74||28.79|
|IDFC Tax Advantage ELSS||33.59||9.27|
|L&T Tax Advantage||23.91||8.75||4.24|
|Quantum Tax Saving||30.84||10.72|
|Reliance Tax Saver||36.30||9.89||4.26|
|Religare Tax Plan||27.02||8.62||3.79|
Year on Year performance of Tax Saving Mutual Fund Schemes
Tax Saving Mutual Fund after DTC
The issue that seems to be bothering the investors is regarding the fate of their investments in ELSS once the DTC comes in to effect. They need not worry. They should make hay while the sun shines. The tax benefit should be used as long as it is available. Once the DTC kicks in all ELSS funds will converted into diversified equity mutual funds without any lock-in period. It is possible that the portfolio construction will change when ELSS funds become regular diversified equity funds.
Tax saving mutual funds are on a death row now but they are still a good bet. ELSS is the only tax saving instrument that is pure equity oriented and has least number of years as lock-in period.
This is a guest post by Anil Kumar Kapila – the views expressed herein are the author’s personal views. The funds that are shown as Best Tax Saving Mutual Funds are 4 & 5 star rated funds from Value Research.
In case you have some questions regarding mutual Funds – feel free to ask. Also share this with your friends who are confused about choosing funds to save tax.