Top 5 ELSS Funds

Tax planning is an essential component of any financial plan. You can claim a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act of 1961. One such investment that qualifies for such a deduction is an ELSS. With roughly 41 ELSS schemes available, it might be tough to select the best one. In this article, Henil Shah discusses why investing in ELSS makes more sense than other options and presents the top five cherry-picked ELSS funds

A majority of us are busy in the final few weeks before the year ends and in the first few weeks of the fresh year because it is time for taxpayers to start looking for and invest in tax-saving options before the end of the fiscal year. We usually begin to get emails from our Human Resource or Accounts Department asking us to submit investment proofs. We are aware of your predicament and thus in accordance with our regular exercise we have identified the top five equity funds that will not only enable you to reduce your tax liability but also boost your wealth over time. Although an equity linked savings scheme (ELSS) is not the only option for saving taxes, why not choose them over ELSS? 

The tax advantages are provided under Chapter VI-A of the Income Tax Act of 1961. Section 80C of Chapter VI-A provides for a deduction of up to ₹1.5 lakhs and ELSS is one such instrument that qualifies. However, there are a number of alternative instruments that might offer tax benefits under Section 80C. Why then not invest in Public Provident Fund (PPF), National Saving Certificate (NSC), Unit Linked Insurance Plan (ULIP), tax-saving bank fixed deposits, etc.? The explanation is that ELSS offers the best of both worlds. They not only help us save money on taxes but also offer the advantage of equity investment. Other options, such as PPF, NSC, etc. entail lower risk but their rewards are also on the lowest end of the range. 

Some of these choices do not even cover the inflation rate in a low interest rate environment. Even in the long run, this results in lesser returns on investment as compared to ELSS. It’s easier to comprehend this with an example. If you had invested ₹1 lakh each in NSC and in an ELSS fund five years ago, your money would have risen to ₹1.46 lakhs at a 7.9 per cent annualised rate in NSC – interest rate for NSC is revised every quarter and currently it is at 6.8 per cent. In the case of ELSS, your money would have grown to ₹1.55 lakhs at a rate of 9.22 percent (annualised average ELSS category return) during the same time period.

The difference is evident as we can see that the accumulated amount on ELSS in five years is approximately 6 per cent more than that of NSC in the same period. However, keep in mind that ELSS funds have a higher risk and are more volatile than other tax-saving options. Judging by historical data, we can see that in the long term ELSS has provided greater returns that can outpace inflation, making it the best tax-saving product. The other advantages of ELSS over other tax-saving vehicles include a shorter lock-in period of three years. It is significantly less than the six and 15 years offered by NSC and PPF instruments, respectively. 

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 10 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 Tax Plan - Direct Plan | Growth Option
 

Since its debut in April 2000, this fund has earned a compounded annual growth rate (CAGR) of 15.07 per cent. Further, during the previous 10 years, this has been in the top quartile. From 2014 through 2022, this fund has never underperformed its category average or benchmark with the exception of 2017 and 2019. In fact, this fund exceeded its category average and benchmark index by a wide margin in 2020, 2021 and 2022. This fund has been steady in terms of returns as it has been in the top quartile 83 per cent of the time during the previous 10 years.

In terms of risk, as measured by rolling maximum drawdown, this fund is riskier than the category. In the last 10 years, the maximum drawdown of this fund has been roughly 36 per cent, while the category average is 37 per cent. However, in terms of three-year rolling maximum drawdown, this fund is riskier than the category average. In terms of short-term performance, this fund has never fallen below the first quartile in the last three years. Interestingly, its average one-year rolling return is approximately 57 per cent while the category average is around 29 per cent. This fund invests with a blend style using its proprietary VLRT framework in which it incorporates the full spectrum of data along deeper aspects related to the three axes of valuation, liquidity and risk appetite.

It views it in a dynamic setting of time, resulting in a multidimensional VLRT framework. The micro level stock selection is guided by the development of this macro narrative. Furthermore, its asset allocation is skewed toward Large-Cap stocks (76.36 per cent) with around 20.83 per cent allocated to Mid-Cap stocks and the remainder allocated to Small-Cap stocks. Up to 56 per cent of its assets are concentrated in the top 10 holdings while 53 per cent are concentrated in the top three sectors. As a result, this fund is highly concentrated in nature. This portfolio is underweight on financials and overweight on consumer staples, energy and services. This fund has a high risk-high return profile and hence is appropriate for aggressive investors.
 

Kotak Tax Saver - Direct Plan | Growth Option

Kotak Mutual Fund introduced its ELSS product in November 2005 and its CAGR from inception is evaluated to be 12.56 per cent. In terms of returns, this fund has done well. From 2014 to 2022, this fund exceeded its benchmark and category average with the exception of 2015 and 2017. In reality, the fund’s performance has improved ever since Harsha Upadhyaya took over as manager in 2015. In terms of long-term returns, this fund has performed admirably, consistently ranking in the top quartile. This may be seen by the fund’s consistency since it has been in the top two quartile 80 per cent of the time in the last 10 years. Further, its average three-year rolling return is approximately 14 per cent while the category average is 13 per cent. 

In terms of risk, this fund’s maximum drawdown is roughly 36.5 per cent while the category average is 37 per cent for the last 10 years. However, its three-year average rolling maximum drawdown is also in line with the category average. In terms of short-term performance, this fund is in the top quartile 77 per cent of the time, with one-year average rolling return of roughly 30 per cent. The investment philosophy of this fund is geared toward value investing with bottom-up stock selection used to construct its portfolio. The fund’s investing strategy is to park funds in companies that are valued at a significant discount to their real value. 

Such intrinsic worth is determined by past performance as well as future growth potential. In terms of asset allocation, 71 per cent of its assets are invested in large-cap stocks, 25 per cent in mid-cap stocks and the remainder in small-cap stocks. This fund is not vulnerable to concentration risk because 41.5 per cent of the assets are allocated to the top 10 holdings with approximately 44 per cent allocated to the top three sectors. This fund is overweight on automobiles, consumer staples and capital goods but underweight on financials. This fund involves lower risk and may thus be chosen by conservative to moderate investors.



 

DSP Tax Saver Fund - Direct Plan | Growth Option

As of December 2022, this fund managed assets of ₹10,445 crore. This fund was set up in 2007 and has done well since then with a CAGR of 14.22 per cent. In terms of returns, this fund has been among the best in the category. With the exception of 2018, this fund exceeded its benchmark and category from 2014 to 2022. In terms of long-term returns, this fund has been in the top quartile with three-year average rolling return of 15.3 per cent compared to the category average of roughly 13 per cent. Furthermore, in terms of consistency of returns, this fund outperforms other funds since it has been in the top two quartiles for the previous 10 years. 

However, when it comes to risk, this fund is riskier than others in its category. This is pretty easily explained by the higher rolling maximum drawdown of 37.2 per cent. Not only that, its standard deviation of 22.86 per cent and beta of 0.99 indicates that this fund is riskier. In terms of near-term performance, this fund has been in the top two quartiles 78 per cent of the time. Its one-year average rolling return is 32 per cent, which is higher than the category average of about 29 per cent. This fund employs a blend strategy in which the fund manager selects individual investment options for the portfolio from a defined universe of eligible investments, seeking both value and growth.

The fund manager uses a bottom-up strategy for stock selection, taking into account low price-to-earnings, price-tobook and price-to-sales ratios, as well as growing margins, asset turns and cash flows, among other factors. In terms of asset allocation, this fund invests 70 per cent of its assets in large-cap stocks and 26 per cent and 4 per cent in mid-cap and small-cap companies, respectively. This fund handles concentration risk fairly with just 45 per cent of the assets committed to the top 10 holdings and 55 per cent dedicated to the top three sectors. It favours financials, technology, automobiles and healthcare while it is underweight on consumer staples, capital goods and construction. Overall, this fund has a high risk-high return profile, making it appropriate for moderately aggressive to aggressive investors.


Launch Date : 18th Jan, 2007 I NAV (₹) As on January 17, 2023 : 91.21 I AUM (₹ Crore) As on December 31, 2022 : 10,445 IExpense Ratio (%) As on
December 31, 2022 : 0.81 I Benchmark : NIFTY 500 TRI I Returns Since Inception (%) : 14.22 I Fund Manager(s) : Kaushal Maroo and Rohit Singhania
 

IDFC Tax Advantage (ELSS) Fund - Direct Plan | Growth Option

This fund, which was launched in 2008, has provided a CAGR of about 18 per cent since its debut. Although this fund had some rough years such as 2016, 2018 and 2019, it gained momentum 2020 onward and has outpaced its benchmark and category average. In fact, it had one of its best years in 2007, returning 55 per cent when the benchmark index and category average were just 38 per cent and 40 per cent, respectively. When it comes to long-term returns, this fund is in the second quartile. Its three-year average rolling returns over a 10-year period is 14.52 per cent, which is greater than the category average of 13 per cent. In fact, this fund is also outstanding at producing consistent returns as it has been in the top two quartiles 75 per cent of the time. 

However, based on its maximum drawdown, this fund is a riskier pick. Its maximum drawdown is 44 per cent compared to the category average of 37 per cent. Even its three-year rolling maximum drawdown comes out to 38 per cent. The nicest thing, though, is that the fund’s risk is justified by the higher returns it provides. This may be seen in the form of its Sharpe and Sortino ratios, which are approximately 0.83 and 0.86, respectively. This fund employs a pure growth investing strategy in which the fund manager identifies companies through a systematic process of forecasting earnings based on a thorough understanding of the industry’s growth potential and interaction with company management to gain access to the company’s core competencies in order to achieve long-term sustainable profit growth.

In terms of asset allocation, this fund invests around 65 percent of its assets in large-cap stocks, 21 per cent in mid-cap and 14 per cent in small-cap businesses. This fund has one of the highest small-cap stock allocations in the category. However, it has done a good job of controlling concentration risk since just 40 per cent of its assets are committed to the top 10 holdings and 47 per cent to the top three sectors. This portfolio favours sectors such as automobiles, materials, healthcare and capital goods while is underweight on financials and technology. However, based on its risk-return profile, this product is better suited to aggressive investors.
 

Sundaram Tax Savings Fund - Direct Plan | Growth Option

This fund was previously known as the Principal Tax Savings Fund. However, following the acquisition of Principal Mutual Fund, this fund is now known as Sundaram Tax Savings Fund. This fund is one of the oldest on the list, having been launched in 1996. It has achieved a CAGR of roughly 18 per cent since inception. In terms of long-term returns, this fund is in the second quartile with three-year average rolling returns over 10 years of 13.82 per cent compared to the category average of 13 per cent. 

Furthermore, this fund is consistent in producing reasonable returns, being in the first two quartiles 62 per cent of the time. In terms of risk, as defined by maximum drawdown, this fund performs decently with a maximum drawdown of 41 per cent and a three-year rolling maximum drawdown of 36 per cent. As a result, when compared to other funds in its category, this fund bears moderate risk. However, its Sharpe and Sortino ratios are pretty remarkable. This suggests that the greater returns generated by this fund compensate for the risk involved. This fund has a growth approach in which the fund manager picks market segments for investment and examines several aspects such as sustainability and superior profit growth along with above average or increasing growth rates.

In terms of concentration risk, while just 45 per cent of its assets are committed to the top 10 holdings, over 58 per cent of assets are concentrated in the top three sectors. Almost 67 per cent is invested in large-cap stocks, 24 per cent in mid-cap stocks and 9 per cent in small-cap companies. It has one of the largest allocations to mid-cap and small-cap stocks in the category. It is overweight on financials, automobiles, services and capital goods but underweight on technology, energy and healthcare. This fund is better suited to moderately conservative to moderate investors based on its overall risk-return profile.
 

Conclusion
If you want to save taxes while simultaneously building wealth in the long run, ELSS is the ideal solution. If you are a conservative to moderate risk-taker, put some of your money in ELSS and some in PPF. This way you may spread your risk while simultaneously saving money on taxes. Rather than waiting until the last minute to invest, spend some time now to review your tax plan and make an informed decision before investing in any tax-saving product. In most cases, people make hasty decisions just before it is time to submit investment details to the company or when trying to save as much on tax as possible before it is time to submit the Income Tax Return (ITR). This certainly is not a wise thing to do.