- ELSS funds give an exemption of 30% if you are in the highest tax bracket (let us ignore cess and surcharge for simplicity). That means if you invest Rs1 lakh in a year, you can claim an exemption of Rs30,000 so your effective investment comes down to Rs70,000. This increases your Return on Investment (ROI) substantially.
- ELSS has a mandatory lock-in period of 3 years and is therefore a very good method of tax saving for first-time investors. It gives dual benefit of tax planning and wealth creation through equities. The 3 year lock-in forces a longer term perspective.
- ELSS can be structured as monthly SIPs and you can claim all the SIP contributions as exemption during the fiscal year. The real advantage is that you can synchronize your tax planning with your income flows and also get the benefit of rupee cost averaging.
The logic of investing in ELSS funds should be the same as in the case of equity funds and you need to benchmark past returns with the benchmark index and the peer group. However, the question is two-fold. Should you invest in ELSS beyond your Section 80C limit and should you redeem ELSS on completion of 3 years? Firstly, if you have exhausted your Section 80C limit, there is no point in buying ELSS funds and locking your money. You can as well opt for equity funds. Secondly, there is no compulsion to redeem your ELSS fund on completion of 3 years. After 3 years, it is like any other equity fund and you can redeem the same as an when you choose. Let us now turn to the top performers among ELSS funds.
Top performing ELSS funds in India
To get a better understanding of ELSS funds performance, let us look at their CAGR performance over the last 5 years. We shall also consider the 1 year return to evaluate consistency and 3 year returns as it represents the lock-in of an ELSS. To give a more transparent picture, only Growth option in Regular plan has been considered. Here is the roster list of top performing ELSS funds.
|Fund Name||1-year Returns (%)||3-year Returns (%)||5-year Returns (%)|
|Quant Tax Plan (G)||7.977%||12.114%||17.005%|
|Axis Long Term Equity (G)||7.484%||14.032%||15.149%|
|Kotak Tax Saver Fund (G)||14.953%||14.158%||14.146%|
|Aditya Birla Tax Relief (G)||0.256%||11.946%||13.979%|
|Invesco India Tax Plan (G)||4.921%||13.128%||13.397%|
|DSP Tax Saver Fund (G)||12.274%||13.241%||13.357%|
|IDFC Tax Advantage (G)||3.276%||14.036%||13.341%|
|Franklin India Taxshield (G)||6.074%||9.862%||12.367%|
|IDBI Equity Advantage (G)||-2.208%||8.290%||12.259%|
|HDFC Long Term Advantage (G)||12.878%||14.985%||11.953%|
While selecting your ELSS fund, remember that it is a long term commitment. Always go with the fund houses that have a reputation to protect. Five year returns are ideal as they give a long term perspective. However, in case of ELSS (considering its lock-in of 3 years), you must also look at 3-year returns to ensure that the exit cost is not too high. A small variance with the 5 year returns is understandable but wild variations are a sign of inconsistency. One year returns are meant to judge the short term flexibility of the fund manager and to keep a tab on whether the fund is trying to be too aggressive in search of returns. This can be a good starting point for your ELSS journey!