Tax saving mutual funds more popularly known as Equity Linked Savings Scheme (ELSS) and are very popular among investors. Over the last few years the corpus of some of these ELSS funds has soared as investors find an opportunity for tax savings as well as for returns.
What are these ELSS Funds?
Equity Linked Savings Funds are mutual fund schemes that are run by asset management companies and invest your money in equities. This means your returns are not guaranteed and they can be volatile. However, you get tax benefits under Sec80C of the Income Tax Act. Amounts invested qualifies for tax benefit up to a sum of Rs 1.5 lakhs. However, one important thing to note is that the income earned is not tax free and would see a 10% long term capital gains tax.
There is a lock-in period of 3 years on the ELSS. Interestingly, the lock-in period on the ELSS is the lowest when you can compare to other tax saving instruments like PPF, ULIPs or tax savings bank deposits, where there is a lock-in of 5-years. However, returns on bank deposits and PPF are more certain. Here are three ELSS instruments that you can invest in:
Canara Robeco Equity Tax Saver Fund
Canara Robeco Equity Sax Saver Fund has been great on returns and has a sound portfolio. The fund has a very diversified portfolio, unlike several other equity mutual funds, where the assets under management are largely skewed towards the financial sector.
Among the 5 top holdings of the bank you would find names like Infosys, ICICI Bank, HDFC Bank, Larsen and Toubro and Tata Steel. Interestingly, a steel stock is in the top holdings.
The 1-year returns from the fund is a solid 69 per cent, while the three year returns is 18% and 5-year returns is 17% on an annualized basis.
The one thing about equity mutual funds is that they tend to move largely in line with the markets. If the markets move higher, the returns are superior and so on.
Mirae Asset Tax Saver Fund
The Mirae Asset Tax Saver Fund like most other funds has given good returns in the last 1-year, thanks to recovery in the markets following Covid first wave. The 1-year returns are a whopping 82%, while the 3-year returns are 20% and the 5-year returns are 22% on an annualized basis.
Again, like most other ELSS, the funds are invested in mostly the largecap pack including names like HDFC Bank, ICICI Bank, TCS, Axis Bank and Infosys. All of these 5-stocks together form almost 30% of the portfolio.
Investors have to note that Equity Linked Savings Scheme have a lock-in period of 3-years and hence it is not possible to withdraw before this term. So, there is no point in suggesting to investors to stay invested for the longer term.
BOI AXA Tax Advantage Fund
This is another fund that has generated good returns in the long term and superb returns in the short term, thanks to the market movement. The one reason to pick this fund is the exceptional rating from Crisil of 5-star. Apart from this, it has been rated 4-star by Value Research. The 1-year returns are a solid 80%, while 3-year returns is close to 15% and 5-year returns at 18% on an annualized basis.
It's always difficult to hazard a guess on which mutual fund could do well and which could be laggards, given the dynamism with which the markets operate. Until a few quarters ago nobody would buy steel stocks. Today, they feature in holdings of mutual funds. While choosing the above, we have kept in mind track record and the rating of the funds.
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