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ELSS MUTUAL FUNDS

 

ELSS funds are the showstopper this year, scoring 28 out of 30 points. Being equity schemes, they are low on safety, but score full points on all other parameters. The returns are high, the income is tax-free, the investor is free to alter the time and amount of investment, the lock in period of three years is the shortest among tax-saving investments and the cost is only 2-2.5% a year. The liquidity is even higher if you opt for the dividend option, and cost is even lower if you go for the direct plans of these funds.

Don't look at ELSS funds as one broad category. Within these, there are schemes with a large-cap orientation, making them more stable than others. Some have a midcap skew, which can be riskier than large cap funds but also have greater potential. The funds that have lined their portfolios with small and mid-cap stocks will be riskier, but can outperform by miles if the small-caps turn out to be multi baggers. The Reliance Tax Saver fund has almost 70% of its portfolio in small and mid-cap stocks. It has outperformed the category in the past three years, churning out 41% returns when the category average is 27.7%. Most of these returns have been generated in the past 16 months. Between December 2011 and August 2013, Reliance Tax Saver was just another tax-saving fund with an annualised return of 9%. Since then, it has shot up 93%, compared to the 55% rise in the average ELSS fund. Invest in such turbo-charged schemes if you want high returns but beware of the gut wrenching volatility.

Investors seeking stability can opt for large-cap funds, such as Franklin In dia Taxshield, ICICI Prudential Tax Plan and Axis Long Term Equity Fund. These move in line with the broader market and can be part of the core equity portfolio.

A few caveats here. While ELSS funds have generated spectacular returns in the past few years, tone down your expectations in the coming years. Equity schemes do well when the market rallies, but suffer when the bears return. These can carry a slightly higher risk because the exit route is blocked. Once you invest, you cannot withdraw your money before the lock-in period of three years. This is why you should have an investment horizon that is longer than this. Equities can be slightly risky over a three-year term as one business cycle takes 2-3 years to play out. So, in three years, one can get caught on the wrong side of the cycle.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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