Top 5 ELSS Funds

ELSS or Equity Linked Saving Schemes are mutual funds which enjoy a tax-saving benefit under Section 80 C of the Income Tax Act, 1961. Investments in ELSS can be made up to a maximum limit of Rs 150,000 every year. This amount can be claimed as deduction from the total taxable income, providing a relief of up to Rs 46,800 in tax for taxpayers in the highest tax bracket. The article explains in detail the working of the ELSS and provides a pointer some of the best in the market 

Meet Raj Mehta, a young professional working with a multinational IT company. While sipping his coffee and checking his emails one morning, a message from the Human Resource Department caught his eye. It was a notice – a reminder for submitting his investment proofs under Section 80 C. Faced with the familiar options of Public Provident Fund (PPF), fixed deposits, ULIP and such tax-saving investment channels, Raj felt that it was time to explore more options. And that is how he stumbled upon the Equity Linked Saving Scheme (ELSS). As he delved into the domain of ELSS, he discovered that it was not just another tax-saving instrument but something quite different from the rest. [EasyDNNnews:PaidContentStart]

The biggest factor in favour of ELSS is that it has the shortest lock-in period of just three years. Unlike the 15-year commitment of PPF or five years for fixed deposits, ELSS provides the freedom to access funds sooner. It’s like having a superhero that responds to your call without making you wait. Then comes the second best part: the potential for significantly higher returns. Traditional options may offer guarantees, but they struggle to keep up with inflation. ELSS, fuelled by the dynamism of the stock market, has the potential for robust growth. It’s like having a superhero that not only saves but also multiplies your wealth. And the ultimate perk? The first ₹1 lakh of ELSS returns are completely tax-free. 

No more worrying about the taxman – ELSS sweetens the deal with tax-free returns, making the journey even more delightful. ELSS does not discriminate based on hefty investment amounts. Through a systematic investment plan (SIP), you can invest in small monthly payments. This flexibility is a boon for young professionals, allowing gradual and effortless wealth-building. Comparing ELSS to its counterparts, PPF offers guarantees but lacks growth potential. ULIPs come with high charges and long lock-in periods. Tax-saving FDs, while offering security, barely beat inflation. ELSS, with its shorter lock-in, higher potential returns, tax-free benefits and SIP flexibility, stands out as an undisputed champion. 

ELSS and the New Tax Regime

Once a favoured choice for investors seeking both long-term wealth creation and tax savings, ELSS now find themselves at the centre of a debate sparked by the implementation of India’s new tax regime. The discourse, echoed among financial analysts and across the social media, revolves around the evolving landscape of tax benefits and capital appreciation that ELSS once seamlessly provided. Under the old tax regime, investors qualified for tax rebates by factoring in savings up to ₹1.5 lakhs under Section 80 C. However, the new tax regime, ushered in by changes in direct taxes as per the Union Budget 2023, operates without such provisions. 

Those opting for the new regime enjoy Income Tax exemption on earnings up to ₹7 lakhs, beyond which they are subject to government-defined tax slabs. Notably, the new regime doesn’t consider savings or investments in its calculations, rendering them irrelevant. The impact of this new tax regime is clearly visible in the inflows of funds in the ELSS category. From April 2023 to December 2023, we saw outflows in six months out of a total of nine months and a total of ₹1,620 crore was withdrawn in the nine months of FY24. 

Net Inflows in ELSS Funds: Last 13 Months


While the new tax regime offers lower tax rates for various income slabs compared to the old tax regime, it comes at the cost of disallowing deductions allowed under the latter. The old tax regime permitted deductions for specified investments or expenses under various sections of the Income Tax Act, 1961, such as Sections 80 C (including ELSS), 80 CCD (NPS), 80 D (health insurance), and 24 (home loan interest payments). The decision between the old and new regimes hinges on whether one can claim these deductions. If so, the old tax regime may prove more advantageous. 

Defining ELSS

ELSS or Equity Linked Saving Schemes are mutual funds which enjoy a tax-saving benefit under Section 80 C of the Income Tax Act, 1961. Investments in ELSS can be made up to a maximum limit of Rs 150,000 every year. This amount can be claimed as deduction from the total taxable income, providing a relief of up to Rs 46,800 in tax for taxpayers in the highest tax bracket. As per a SEBI circular, 80 per cent of the ELSS mutual fund’s investments are in equity and equity-related instruments. It has a lock-in period of three years during which no redemption can be made. This is an added benefit to investors as the funds continue to earn compounded return during this mandatory lock-in period and can give capital appreciation that could finance long-term goals like building a retirement corpus. 

Performance Analysis of ELSS Funds

ELSS funds have showcased their mettle as an investment option with a consistent and competitive performance record. Over the past three years, ELSS funds have generated an impressive average annual return of 19.27 per cent, and their five-year performance stands at 17.46 per cent. This performance not only qualifies them as a potential tax-saving avenue but also as a source of wealth creation. In comparison to other mutual fund categories, ELSS funds have held their own remarkably well. They have notably outperformed several categories, such as sectoral (banking and pharmaceutical) and thematic (energy), and even Large-Cap and flexi-cap, across most timeframes. 

Their standout performance lies in their ability to deliver competitive returns while offering the additional benefit of tax-saving, making them an attractive option for investors. But do note that ELSS funds have underperformed in most other categories in the three, five and ten-year periods. This is likely since ELSS funds tend to have a higher lock-in period and are also subject to Capital Gains Tax. 

Even if one transitions to the new tax regime, continuing to invest in ELSS solely for wealth creation remains a viable option. While tax savings may not be the exclusive motive, ELSS can align with broader long-term financial goals. In this evolving tax landscape, ELSS retains its potential as a tool for wealth accumulation, offering investors the flexibility to adapt to changing tax scenarios while prioritising their financial objectives. In the next section, we will take you through the five best funds in this category. 

Methodology

We employed our proprietary screener to generate a list of the best ELSS funds by analysing quantitative factors such as long-term performance of over 5 years, consistency of performance using three-year rolling returns, risk using rolling maximum drawdown and near-term performance using one-year rolling returns. Furthermore, depending on their final score, we split all funds into four quartiles. The funds in the first two quartiles were next subjected to qualitative examination. We examined the fund’s portfolio, portfolio concentration, sector allocation and fund manager in qualitative analysis. Finally, we selected the best five ELSS funds based on quantitative and qualitative criteria 

Quant ELSS Tax Saver Fund (G) 

This fund demonstrates an impressive track record of outperformance compared to its category average. Over the past seven years, the fund has consistently generated returns above its peers, with a three-year rolling return of 24 per cent versus 13.30 per cent for the category average. This trend continues even further back, with five-year and seven-year rolling returns exceeding the average by a significant margin. This fund has generated a 20.2 per cent annual return in 70 per cent of times for investors holding the funds for at least five years. So you can expect a return in double-digits if you are holding this fund for five years. Furthermore, the fund boasts stellar SIP returns, generating a remarkable 36.86 per cent annualised return over a five-year period. This translates to a total corpus of Rs. 14.73 lakhs from an investment of Rs 10,000 every month which translates into Rs 6 lakhs, highlighting the fund’s potential for wealth creation even through smaller, regular investments. The fund exhibits a well-diversified sector allocation, with no single sector exceeding 22.98 per cent of the portfolio. This includes a focus on financially stable sectors like metals and mining and energy, alongside exposure to growth sectors like financials and healthcare. This balanced approach reduces the overall risk while capturing opportunities across diverse segments of the economy. Nonetheless, when it comes to the number of stocks, the fund holds only 32 stocks and its top 10 stocks carry 56.74 per cent weightage. In terms of portfolio aggregates, large-cap stocks form 63.72 per cent and Mid-Cap stocks form 24.68 per cent of the portfolio. Looking at the individual holdings, the fund features prominent blue-chip names like National Thermal Power Corp Ltd., ICICI Bank Ltd. and Bharti Airtel Ltd. These established companies with strong fundamentals contribute to the fund’s stability and long-term growth potential. In terms of risk-adjusted return, the fund has better Sortino ratio of 2.52 against the category average of 1.56. Higher the ratio, the better it is. The fund is suitable for high-risk investors who have stomach for volatility. 

NAV as of Jan 15, 2024.........₹365.9 I Returns since inception (Per Annum)...... 22.46% Expense ratio (Dec 31, 2023) ...... 0.76% I AUM (Rs Crore)..... ₹6,416.00 I
Benchmark ...... NIFTY 500 TRI
 

SBI Long Term Equity Fund – Reg (G)

SBI Long Term Equity Fund, an ELSS from India’s largest fund house by AUM, has demonstrated a consistently strong performance track record, outperforming its category average across all the trailing return periods. Over the past one year, it has generated a remarkable 44.97 per cent return, compared to the category average of 33.30 per cent. This trend holds true in both the longer timeframes: the three-year return of 25.90 per cent outpaces the category’s 21.40 per cent, and the five-year return of 20.52 per cent exceeds the average of 18.88 per cent. This consistent alpha generation makes the fund a compelling choice for investors seeking superior long-term returns. Further strengthening its case is its impressive SIP return performance. Investing Rs 6 lakhs over five years would have accumulated a total corpus of Rs 11.72 lakhs, translating to a 27.14 per cent annualised return. This showcases the fact that the fund has generated better returns even through the SIP route. The fund exhibits balanced asset allocation, with a tilt towards large-cap holdings (56.13 per cent). This provides a foundation of stability while offering exposure to mid-cap (23.72 per cent) and Small-Cap (15.68 per cent), thus spacing for potential growth and generating alpha. This balanced approach is reflected in its sector allocation as well, with diversification across sectors like financials (21.40 per cent) and energy (13.66 per cent), alongside growth-oriented sectors like healthcare (8.94 per cent) and automobile (8.22 per cent). Looking at individual holdings, the fund focuses on established blue-chip names like ICICI Bank Ltd. (3.95 per cent), HDFC Bank Ltd. (3.88 per cent) and Larsen & Toubro (3.45 per cent). These companies offer stability and contribute to the fund’s overall risk profile. When it comes to risk-adjusted return, the fund has lower beta and better Sortino ratio compared to its peers. Nonetheless, in terms of the Sharpe ratio, it is far below its industry average and hence the fund is generating lower return in comparison to its peers. Hence, the fund is more suited to investors with moderate to high-risk appetite.

NAV as of Jan 15, 2024 ...........₹368 I Returns since inception (Per Annum) ........... 16.54% Expense ratio (Dec 31, 2023)...... 0.98% I AUM (Rs Crore) ..... ₹18,715.00 I Benchmark ..... S&P BSE 500 TRI  

HDFC ELSS Tax Saver (G)

HDFC ELSS Tax Saver Fund is another top-rated tax-saver mutual fund you can think about. The fund has showcased commendable performance in trailing returns compared to its category averages. Over the last one year, the fund has delivered an impressive 38.24 per cent, outperforming the category average of 33.30 per cent. Similarly, the three-year trailing return stands at 26.55 per cent, surpassing the category average of 21.40 per cent. The story is the same for even a five-year horizon. For investors who prefer SIP an investment of Rs 6 lakhs over five years has yielded a total corpus of Rs 11.17 lakhs, generating a profit of Rs 5.17 lakhs. The fund maintains a well-balanced market capitalisation-wise allocation, with a predominant focus on large-cap stocks, constituting 83.07 per cent of the portfolio. This provides stability to the fund, supplemented by an 8.25 per cent allocation to mid-cap stocks and a 1.70 per cent in small-cap stocks at the end of December 2023. In terms of sectoral allocation, the fund exhibits a diversified portfolio. The financial sector dominates with 31.17 per cent, indicating a strategic alignment with the market trends. Healthcare follows suit with a robust 12.35 per cent, and technology and energy sectors contribute 10.44 per cent and 10.17 per cent, respectively. This diversification mitigates sector-specific risks. The fund maintains low volatility with a standard deviation of 12.25 compared to the category average of 12.97. The beta of 0.86 emphasises its stability against market fluctuations (category average: 1.58). While the Sharpe ratio of 1.61 indicates a positive risk-adjusted return, the Sortino ratio of 3.12 portrays better risk-adjusted performance, ensuring a smoother investment journey. It has displayed consistent outperformance in trailing returns, a history of rewarding SIP investments, and a well-balanced portfolio across market capitalisations and sectors. Along with this, its low volatility, coupled with better risk-adjusted ratios, makes it an attractive proposition for investors aiming for stability and growth in their portfolio. 

NAV as of Jan 15, 2024 ....... ₹1198.59 I Returns since inception (Per Annum) ......... 15.40% Expense ratio (Dec 31, 2023) ...... 1.14% I AUM (Rs Crore)...... ₹13,086.00 I Benchmark ...... NIFTY 500 TRI 

Bank of India ELSS Tax Saver – Reg (G) 

The Bank of India ELSS Tax Saver Fund has consistently demonstrated commendable rolling returns compared to its category average. Over a one-year period, the fund has outperformed with a return of 19.60 per cent against the category average of 12 per cent. This trend continues across various timeframes. This fund has generated a 13.5 per cent annual return in 70 per cent of times for investors holding for at least five years. For investors seeking long-term wealth creation, the Bank of India ELSS Tax Saver Fund has proven to be a lucrative choice. A SIP investment of Rs 10,000 every month for the last five years would have amounted to Rs 6 lakhs, thus yielding a remarkable total corpus of Rs 11.92 lakhs and generating a profit of Rs 5.92 lakhs. The annualised return of 27.85 per cent underlines the fund’s ability to consistently deliver substantial returns through disciplined and systematic investing. The fund maintains a well-diversified portfolio in terms of market capitalisation. With 64.19 per cent allocated to large-cap stocks, it provides stability to the portfolio. A judicious 17.78 per cent in mid-cap stocks and 14.74 per cent in small-cap stocks adds an element of growth potential, ensuring a balanced approach to wealth creation. In terms of sectoral allocation, the fund exhibits a strategic and diversified approach. The financial sector dominates with 39.39 per cent, showcasing confidence in the banking and financial services industry. Energy follows with 9.92 per cent, healthcare with 6.87 per cent, and capital goods with 6.67 per cent. This diversification helps mitigate sector-specific risks. While the fund exhibits higher standard deviation (volatility) compared to the category average, the beta is lower, indicating relatively lower volatility against market fluctuations. The Sortino ratio of the fund is higher compared to its peers, signifying better risk-adjusted returns. With consistently superior rolling returns, an impressive SIP track record, and a well-diversified portfolio across market capitalisations and sectors, the fund stands out in terms of prudent fund management. 

NAV as of Jan 15, 2024 ........ ₹161.33 I Returns since inception (Per Annum) ........ 19.06% Expense ratio (Dec 31, 2023) ....... 1.25% I AUM (Rs Crore) ..... ₹1,040.00 I Benchmark ..... NIFTY 500 TRI 

Franklin India ELSS Tax Saver Fund (G) 

One of the oldest tax savings funds, it merits a noteworthy look by investors. The fund was being managed by Anand Radhakrishnan from September 8, 2021 till his recent departure from the organisation. Over the years, he emerged as one of the most prominent managers in the Indian mutual fund industry. As per the strategy adopted by the fund over the years, the investment process continues to be research-intensive in nature. Managers and analysts jointly draw up the investment universe. Analysts gauge companies using discounted cash flow models and parameters such as return on equity, price-to-book value, and price-to-earnings. The fund manager seeks companies with clean balance-sheets. He looks for steady businesses with sustainable competitive advantages that can generate healthy ROEs and returns on capital employed. All this has helped the fund to perform better over a longer time horizon. This fund has generated the highest return amongst ELSS funds in the last 10 years. Over the past year, it has clocked a 37.43 per cent return, surpassing the category average of 33.30 per cent. This trend persists over three years, with a 23.96 per cent return against the average 21.40 per cent. A five-year SIP investment of Rs 6 lakhs would have accumulated a corpus of Rs 10.98 lakhs, translating to a healthy 24.4 per cent annualised return. The fund adopts a prudent approach to asset allocation, with a significant tilt towards large-cap equities (72.09 per cent). This provides a strong foundation of stability while offering measured exposure to mid-cap (13.07 per cent) and small-cap (9.91 per cent) stocks for potential growth. This balanced approach helps the fund navigate market fluctuations while keeping an eye on the long-term goal of wealth creation. The fund’s consistent outperformance, strong SIP returns, and balanced asset allocation suggest that it’s a well-rounded option for investors seeking a tax-efficient way to build wealth over the long term. 

NAV as of Jan 15, 2024 ....... ₹1350.84 I Returns since inception (Per Annum) ....... 16.82% Expense ratio (Dec 31, 2023)........ 1.05% I AUM (Rs crore) ........ ₹5,962.00 I Benchmark .... NIFTY 500 TRI

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