Tax Saving ELSS Mutual Funds

Let me start off by telling you that there are plans to phase out the tax breaks on ELSS mutual funds with the introduction of the Direct Tax Code (DTC), so this avenue is going to be closed in the coming years. However, you can still invest in it this year and get tax breaks. These tax saving mutual funds are covered under Section 80C, which means that you can invest a maximum of Rs. 1 lakh in them, and reduce that amount from your taxable income. There is a lock-in period of 3 years on such funds, which means that you can't sell these funds within 3 years of your purchase date. I saw an interesting question on Value Research some time ago where someone had written in to ask what happens when they select the dividend re-investment option in the case of a ELSS fund. The dividend that is invested back in the scheme is considered fresh investment, so what happens is that this money is further locked in for three years, and this can create an infinite loop. I'm not sure what will happen going forward with DTC coming in, but it's best to play it safe, and go for the Dividend or Growth option of the ELSS you're buying. Before we get down to the options available under ELSS funds, let's recap the points discussed so far: The tax benefit of ELSS will be phased out with the introduction of DTC. The tax benefit is still available this year. There is a lock in of 3 years, so you can't sell these tax saving mutual funds within 3 years of purchase. If you use the dividend re-investment option then the amount re-invested will be treated as fresh investment, and will be locked in for 3 years from the time of re-investment. ELSS Mutual Fund Options I wrote a post on how to find tax saving mutual funds some time ago, and I used that information to get a list of all the ELSS mutual funds currently available in India, and then narrow down options from there. Then I looked at the funds that were around for 5 or more years, and took the 10 best performing out of them. After that I noted their expense ratio, as well as their inception date in the table below. Doing this gave me a list that has some tax saving funds that have been around for a very long period, and have done reasonably well over that period. The expenses are important because they eat up your returns, so I wanted to highlight them as well. The limitation with this list is that it doesn't contain any mutual funds that have been around for less than 5 years even if they performed well. For example – DSP Blackrock is a ELSS mutual fund that has been around for about 4 years, has done well during that time, but is missing from this list. Name Inception Date 5 year returns Expense Ratio Birla Sun Life Tax Relief – 96 March 1996 16.57% 1.96 Canara Robeco Can Equity Tax Saver March 1993 22.31% 2.38 HDFC Tax Saver March 1996 17.80% 1.86 ICICI Prudential Tax Plan August 1999 15.48% 1.98 SBI Magnum Tax Gain Scheme – 93 March 1993 16.32% 1.78 Principal Personal Tax Saver March 1996 16.42% 2.19 Franklin India Tax Shield April 1999 17.34% 2.10 Sundaram Tax Saver Nov 1999 17.73% 1.96 Sahara Tax Gain March 1997 22.31% 2.50 Reliance Tax Saver August 2005 15.14% 1.88 All data from Value Research This list is not sorted in any particular order, and that's deliberate because as soon as you sort something your brain tends to think of it as best to worst from top to bottom, but that's not the case. For mutual funds – the best mutual fund is the one that will give you the maximum return for your holding period, but since that's in the future, there is no way to really predict which one will do better than the rest. In the absence of that I compiled a list of long standing performers, and have presented you with that information, and if you think this criteria makes sense, then you can select one or two funds from this list for your investment.   I will also recommend going to Value Research and doing some more research, and playing with their tools because they do have a lot of good tools in there.

source: Onemint

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Yours

Murali........