Equity Linked Savings Schemes (ELSS) are a good way to save tax. They may not be as popular as some of the more traditional instruments like the public provident fund or the bank tax savings schemes, but, they are quickly catching on.

1) ELSS Funds have a lock-in of only 3 years, as compared to most other tax saving instruments like PPF, NSC, Bank saving deposits etc. In the PPF the lock-in is 15 years, while in the case of bank deposits it is 5 years.

2) Dividends are tax free, while there is no capital gains. So, the returns are tax free. This is not the case in some instruments like NSC and the Bank tax saver deposits, where the interest is not exempted from tax.

3) Qualifies for tax rebate under Sec 80C of the Income Tax Act.

How we have chosen the top ELSS Funds for 2016?

We have used a number of parameters. We have taken the ratings from leading portals. We have also evaluated the portfolios to see if there is any potential for an upside. For example, we like schemes where there is a decent amount of exposure to banks, because banking stocks have been beaten down and there is a potential for upside.

The past track record of the fund has also been taken into consideration before we select the fund. The fund should be at least having a track record of more than 5 years. Based on that we have arrived at the following ELSS funds that could be best for investors.

a) Axis Long Term Equity Fund

What we like about this fund is the solid portfolio of banking stocks, which are more retail driven. HDFC Bank and Kotak Mahindra constitute almost 14 per cent of the portfolio.
The fund has generated a return of almost 25 per cent in the last three years. However, the one year returns has been negative 5 per cent, as markets have fallen during the period.
Value Research Online has accorded a 5-star rating to the fund. We believe that the portfolio of the fund leaves upside potential, making it a good bet.

2) Franklin India Tax Shield Fund

Franklin India Tax Shield Fund has given a returns of 13 per cent in the last 5 years. This along with the Sec80C benefits and the tax free returns makes the overall yields excellent.
Value Research Online has accorded a 5-star rating to the fund. The portfolio has names like HDFC Bank and Infosys, which are two of the best performing stocks in a falling market.

3) Tata India Tax Savings Fund

This fund has managed to shield itself from the huge drop in the stock market over the last 1 year. In fact, while the Sensex has fallen near 10 per cent in the last one year, the fund has generated a negative return of only 1 per cent in the last 1 year. Again, Value Research has accorded a 5-star rating to the fund. The portfolio remains rock solid with Infosys and HDFC Bank being top of the portfolio. A good bet for long term investors.

Conclusion

It is the time of the year, when you busy plan to save tax. The above mentioned ELSS Schemes could offer you decent returns in the next three years. Good bet, especially as the markets have fallen dramatically since the start of 2016. What this means that you are getting to buy these schemes at a lower net asset value, as compared to anytime in the last 1 year.

Remember there is a lock-in period of 3 years for Equity Linked Saving Schemes.

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