- ELSS funds are extremely tax efficient as they offer Section 80C benefits with a lock-in period of just 3 years
- Being an equity fund, the ELSS offers the dual advantage of tax benefits and long term wealth creation through equities
- Due to the mandatory lock in period of 3 years, the fund managers are able to take a long term perspective to fund management
Since there are a wide array of ELSS schemes available in the market, selecting the Top ELSS funds becomes a key challenge. The best ELSS funds to invest in 2019 can be selected on the basis of returns, risk adjusted returns or on the basis of consistency of returns. Let us look at the top ELSS funds 2019 based on returns and consistency.
Best ELSS Funds to invest in 2019
We look at the comparison of ELSS funds over a five year period. We are ignoring direct plans as they have been in existence for only 6 years and may not really give a good idea of long term returns. Secondly, we are only considering growth plans and not the dividend payout plans or the dividend reinvestment plans. Dividend plans are not efficient value compounders and can defeat the basic purpose of long term investing. Here is a list of the top 10 ELSS funds evaluated based on the CAGR returns for the last five years.
|Fund Name||1-Year Returns (%)||3-Year Returns (%)||5-Year Returns (%)|
|Tata Tax Saving Plan (G)||15.89%||13.955%||11.37%|
|Quant Tax Plan (G)||7.79%||9.89%||11.31%|
|Axis Long Term Equity (G)||15.41%||15.86%||10.84%|
|Birla Sun Life Tax 96 (G)||7.38%||13.85%||10.83%|
|DSP Tax Saver Fund (G)||16.19%||11.85%||10.16%|
|INVESCO India Tax Plan (G)||10.59%||12.98%||9.44%|
|JM Tax Gain Fund (G)||15.16%||14.29%||9.18%|
|Aditya Birla Sun Life Tax (G)||5.62%||11.96%||9.13%|
|Kotak Tax Saver Fund ((G)||13.17%||12.33%||8.97%|
|HDFC Long Term Advantage (G)||10.54%||12.45%||8.67%|
The ranking has been done on 5 year compounded returns. However, apart from just looking at returns of the funds over five years, there are some additional criteria you can look at before selecting the ELSS fund to invest in.
Additional criteria to evaluate ELSS Funds
Long term returns over five years offer the best bet to judge how the ELSS fund has compounded wealth. That decision can be ratified by considering some additional factors.
- Focus on consistency of returns. One way to judge the consistency of the ELSS performance is to look at the variation between 1-year, 3-year and 5-year returns. While some variation is apparent due to the differing time periods, wild swings are a sign of inconsistency. When funds are inconsistent, it is hard to decide the timing of entry. Consistent funds are more predictable.
- Measures like Sharpe and Treynor can give a good idea of risk adjusted returns on the fund. It separates the funds that are earning higher returns through higher risk compared to funds that outperform due to better stock selection skill. This can be a useful factor to ratify the ELSS buy decision.
- Qualitative factors matter too. In the monthly fact sheets of the fund, take a quick look at the portfolio and sectoral mix. These give you a qualitative picture of the ELSS portfolio and you can take a call on the risk accordingly.
- Focus on SIP returns rather than on point-to-point returns. This is more practical as most investors don’t buy ELSS funds in lump-sum. Instead, they structure periodic SIPs on these ELSS funds so as to get the best value for money through rupee cost averaging.
Don’t go overboard while buying ELSS funds
There are a few things you need to be cautious about ELSS funds. Traditionally, ELSS funds have not outperformed pure equity funds over a longer period of time. Hence, the benefit is more due to Section 80C tax breaks available. Therefore your ELSS investments should be limited to your Section 80C ceiling of Rs1.50 lakhs and after that you can stick to equity funds. That way, you can avoid the unnecessary lock-in.
Lastly, remember that ELSS funds are an equity product, and hence, are exposed to equity risks. That is evident from the fact that five year returns between 2014 and 2019 have not been too impressive. That is the market risk you carry in any ELSS investment.