As the return filing season approaches, investors wanting to save tax can consider Equity Linked Savings Schemes (ELSS), which are among the investment products under the 80C basket. Investments of up to ₹1.5 lakh made in ELSS in a financial year are eligible for deduction under Section 80C of the Income-tax Act, 1961.
Do note that Budget 2020-21 has proposed an optional new personal tax regime, which brings down taxes while taking away certain deductions including Section 80C. That means, only investors who stay in the old tax regime can continue to avail the deduction benefits. The new tax regime, which is anyway optional, will kick in from financial year 2020-21.
Short lock-in period
ELSS are equity-diversified schemes investing primarily in equity and equity-related instruments across market capitalisation. Besides tax benefits under the current tax regime, the lock-in period for these instruments is relatively shorter, at three years, compared to six years for National Savings Certificates and 15 years for PPF.
Investors cannot redeem ELSS units before the end of three years. Also, if the investment in ELSS is done through the Systematic Investment Plan (SIP), every instalment will have a three-year lock-in from the date of that specific instalment.
In the long run, the top performing funds in the ELSS category have managed to outperform broader market indices and the funds in equity diversified categories, including large-cap, mid-cap, small-cap and multi-cap.
Here, we present three ELSS schemes for investment which are rated five-star by BusinessLine Portfolio Star Track MF Ratings . They are the top performing funds in the ELSS category and managed to register better risk-adjusted returns in the long run.
BusinessLine Portfolio Star Track MF Ratings are based on an in-depth analysis of the funds’ historical performance measured both in terms of return and risk — using rolling returns and Sortino ratios, respectively. The funds with the highest scores are assigned five-star rating. Funds rated five and four stars have managed to outperform consistently in the long run.
Axis Long-Term Equity
The biggest fund in the ELSS category, with over ₹21,997 crore in assets (as of January 2020), Axis Long-Term Equity has continued with its steady outperformance over its peers and benchmark since its launch. Its performance, as measured by three-year rolling returns calculated from the past seven years’ NAV history, shows that the fund has delivered 19.3 per cent CAGR while the ELSS category registered 13.6 per cent. The consistency of the fund has been attributed to its fund manager Jinesh Gopani. The fund has a reasonably concentrated portfolio across sectors (holding 30-37 stocks over the last three years).
Axis Long-Term Equity uses a bottom-up approach and picks stocks from the universe of the S&P BSE 200 index.
DSP Tax Saver
DSP Tax Saver has been one of the few funds that retained their position in the first and second quartiles in most of the time frames. Its performance, as measured by three-year rolling returns calculated from the past seven years’ NAV history, shows that the fund has delivered 16.2 per cent CAGR while its benchmark Nifty 500 TRI posted 13.5 per cent.
The performance of the fund has been notable, especially in the market downturns. For instance, in 2015, when the Nifty 50 TRI corrected by 20 per cent, the fund managed to contain the fall well and delivered a negative return of 14 per cent. The ELSS category corrected 16 per cent during the period.
The fund manger has the leeway to select stocks from the wide universe of the Nifty 500 index. One-fourth of the portfolio allocation to mid- and small-cap stocks has helped the fund spice up returns.
Invesco India Tax
Invesco India Tax has been a decent performer in the ELSS category. Its performance, as measured by three-year rolling returns calculated from the past seven years’ NAV history, shows that the fund has delivered 16 per cent CAGR while its benchmark BSE 200 TRI posted 13.4 per cent. The performance of the fund in both bull and bear runs has been noteworthy.
The higher allocation to large-cap stocks helps it withstand the downturns well while an 18-30 per cent exposure to mid- and small-cap stocks (over the last three years) has spiced up returns. It cherry-picks the stocks from the universe of the S&P BSE 200 index, which are growing their businesses on a sustainable and profitable basis and are available at reasonable prices.